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Special audit, Department of Health Services, behavioral health services for adults with serious mental illness in Maricopa County

Special audit, Department of Health Services, behavioral health services for adults with serious mental illness in Maricopa County

Special Audit
Department of Health
Services–
Behavioral Health Services for Adults
With Serious Mental Illness in
Maricopa County
Performance Audit Division
Debra K. Davenport
Auditor General
SEPTEMBER • 2006
REPORT NO. 06 – 09
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Representative Laura Knaperek, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Ed Ableser
Representative Ted Downing Senator Carolyn Allen
Representative Pete Rios Senator John Huppenthal
Representative Steve Yarbrough Senator Richard Miranda
Representative Jim Weiers (ex-officio) Senator Ken Bennett (ex-officio)
Audit Staff
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Monique Cordova, Team Leader
Tara Nielson
Elizabeth Shoemaker
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
September 28, 2006
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Ms. Susan Gerard, Director
Department of Health Services
Transmitted herewith is a report of the Auditor General, A Special Audit of the Department
of Health Services—Behavioral Health Services for Adults with Serious Mental Illness in
Maricopa County. This report is in response to Laws 2005, Chapter 256, Section 1 and was
conducted under the authority vested in the Auditor General by Arizona Revised Statutes §41-
1279.03. I am also transmitting with this report a copy of the Report Highlights for this audit
to provide a quick summary for your convenience.
As outlined in its response, the Department of Health Services agrees with all of the
findings and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on September 29, 2006.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
The Office of the Auditor General has conducted a special audit of the delivery of
behavioral health services to adults with serious mental illness (SMI) in Maricopa
County, pursuant to Laws 2005, Chapter 256, Section 1. The audit was conducted
under the authority vested in the Auditor General by Arizona Revised Statutes (A.R.S.)
§41-1279.03.
Serious mental illness (SMI) is not a specific mental disorder, but a designation for a
group of mental health conditions. To obtain SMI designation in Arizona, a person
must be at least 18 years old and have a qualifying psychiatric diagnosis and a
resulting functional impairment.1 As of fiscal year 2005, more than 18,000 adults with
SMI were enrolled to receive services in Maricopa County, according to the Arizona
Department of Health Services, Division of Behavioral Health Services (Division). The
number of adults with SMI in Maricopa County has risen by approximately 50 percent
since 2000. Arizona, once near the bottom in state mental health spending, is now
tenth among the states.
The Division’s funding to administer the system includes Medicaid and KidsCare
monies—a blend of federal funding and state matching monies—from the Arizona
Health Care Cost Containment System (AHCCCS), additional monies from the
State’s General Fund, and other government funding, including federal grants, county
funds, and other legislative appropriations. The growth in Arizona’s mental health
funding is due, in part, to population growth and the expansion of Arizona’s Medicaid
program that occurred following voter approval of Proposition 204 in 2000, which
expanded Medicaid eligibility up to 100 percent of the federal poverty guidelines.
The State of Arizona contracts with managed-care organizations called “Regional
Behavioral Health Authorities,” or RBHAs, to administer behavioral health services in
specific geographic service areas of the State. The Division contracts with a private
company, VO of Arizona, Inc. (ValueOptions), to administer Maricopa County’s
behavioral health system. 2, 3
1 Psychiatric diagnoses are standardized and published in The Diagnostic and Statistical Manual of Mental Disorders,
Fourth Edition (DSM-IV), published by the American Psychiatric Association. It is the official reference guide that
psychiatrists and other clinicians use to identify psychiatric diagnoses.
2 This audit focused on that portion of the system that provides services to adults with SMI. Other parts of the system
administered by ValueOptions cover children’s mental health services, general mental health, and substance abuse.
3 The State contracts with VO of Arizona, Inc., an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned subsidiary of
Virginia-based FHC Health Systems. In addition to VO of Arizona, Inc., ValueOptions, Inc. has affiliates that manage
behavioral health systems in several states, including Colorado, Florida, Massachusetts, New Jersey, New Mexico, North
Carolina, and Texas.
Office of the Auditor General
SUMMARY
page i
1 The Division and the RBHAs refer to people receiving services as consumers.
This audit focused on the following main topics:
􀁺􇩈 How the money for adult SMI services is being spent in Maricopa County.
􀁺􇩗 Whether there is an adequate focus on the outcomes achieved by the services.
􀁺􇩔 The use of SMI monies and how effectively the Division conducts financial
oversight.
􀁺􇩈 How effectively the Division reviews the levels and costs of services reported by
ValueOptions and its subcontractors.
SMI monies fund a diverse range of services in Maricopa
County (see pages 13 through 17)
In fiscal year 2005, program expenses for adults with SMI in Maricopa County totaled
approximately $243 million. These monies were spent primarily on a diverse range of
services shown in Table 1 (see page iii). Specifically, support, including case
management services such as helping consumers obtain services and monitoring
service delivery, accounted for about 42 percent of the amount spent on services.1
The rest went to such services as medication, inpatient and residential care,
rehabilitation, and crisis intervention. ValueOptions provided most of the case
management and other support services, while subcontractors provided nearly all of
the other services.
Division should strengthen focus on outcomes (see
pages 19 through 29)
Research shows that adults with SMI can recover and that outcome goals should
determine the services provided. To date, however, the focus on what expenditures
are accomplishing has been limited as the Division continues to implement basic
system requirements brought on by a 1981 lawsuit, Arnold v. Sarn. The Arnold v. Sarn
lawsuit was filed on behalf of people with SMI in Maricopa County and alleged that
the State and Maricopa County failed to provide them adequate community health
services as required by law.
The Division is attempting to move its behavioral health program in a results-oriented
direction, in part by adopting a recovery-based model aimed at helping people make
progress toward recovery from SMI. However, the Division may experience difficulty
State of Arizona
page ii
in moving further in this direction, in large part because it must continue to comply
with the Arnold v. Sarn lawsuit and other federal and state process requirements.
Compliance with lawsuit requirements is measured through a court-ordered review
that is not designed to measure consumers’ progress toward recovery over time, but
rather focuses on the consumer’s status on the day of the review. Experts and clinical
advisers who provided input to auditors noted that the emphasis in Maricopa County
is focused on the process of service delivery rather than the level of progress
Office of the Auditor General
page iii
Table 1: ValueOptions’ SMI Expenses
By Type of Service Delivered
Fiscal Year 2005
(Unaudited)
Expenses
(in millions) Service Category Description
$101.0 Support To plan clinical treatment, help consumers obtain services and
resources (such as housing or food preparation), and monitor
service delivery.
41.1 Medication To provide prescription drugs intended to prevent, stabilize, or
improve symptoms.
26.5 Inpatient services To provide inpatient detoxification and psychiatric services delivered
in hospitals and other inpatient facilities.
17.8 Residential services To provide 24-hour residential services, including structured
treatment and room and board.
13.9 Rehabilitation
services
To provide education, coaching, training, and other services,
including securing and maintaining employment.
13.7 Treatment services To provide counseling, therapy, assessment, evaluation, screening,
and other services to reduce symptoms and promote functioning.
12.7 Medical services To provide services to reduce symptoms and improve or maintain
functioning, including laboratory, radiology, and medical imaging.
Also includes medication management.
9.9 Crisis intervention
services
To provide telephone crisis lines, mobile crisis intervention units, and
crisis services delivered at two psychiatric rehabilitation centers.
6.1 Day programs To provide skills training and development, behavioral health
prevention/promotion, medication training and support, support to
maintain employment, and self-help/peer services to improve
consumers’ ability to function in the community.
0.5 Other To provide other services, including some housing, vocational,
screening, and evaluation services.
$243.2 Total
Source: Auditor General staff analysis of financial information provided by ValueOptions for fiscal year 2005 from its
financial accounting system and ValueOptions’ audited financial statements for fiscal year 2005.
consumers achieve, and they attributed the Division’s lack of focus on consumer
outcomes to the rigidity of process measurements in the lawsuit agreements.
To make further progress in moving to a results-oriented approach, the Division
should take action on two main fronts:
􀁺􇩉 Incorporating outcome measures into oversight mechanisms. The Division
should continue to develop outcome measures, such as employment and
number of crises, into its oversight of the behavioral health system and its
contract with the RBHA. The Division should continue to allow the RBHA to earn
a portion of its profits through the achievement of specified performance
outcomes.
􀁺􇩒 Reducing process-oriented measures that do not contribute to results. The
Division should consider renegotiating measures of improvement in the court
orders arising from the lawsuit. Specifically, the Division should determine which
court mandates focus on process rather than outcomes and inhibit full
implementation of an outcome-oriented model, discuss this with the plaintiffs,
and work to modify the provisions.
Division can improve financial oversight and limit use of
SMI monies (see pages 31 through 39)
Many of the Division’s tools for monitoring the solvency and expenses of
ValueOptions and other RBHAs appear to be working reasonably, but some can be
improved. Financial solvency is key to ensuring that RBHAs can continue to deliver
services without interruption, and the Division has several mechanisms that appear
to be adequately monitoring ValueOptions’ solvency. Similarly, many steps for
controlling expenses, such as contractual restrictions on service profits and
administration, are in place. However, auditors identified two areas in which
processes can be strengthened:
􀁺􇩔 Tailoring financial audits to ensure that monies are spent appropriately. The
financial audits that ValueOptions is required to undergo provide some
assurance regarding ValueOptions’ financial reporting and use of program
monies, but do not sufficiently enable the Division to ensure that monies are
spent appropriately. The Division could improve spending oversight by requiring
a compliance audit that would determine if ValueOptions used monies in
accordance with contractual requirements. For example, it should consider
requiring a compliance audit in line with the American Institute of Certified Public
Accountants’ professional standards for determining compliance with defined
requirements.
State of Arizona
page iv
􀁺􇩌 Limiting the use of SMI monies for other programs. The Division allows
ValueOptions to use monies allocated for adults with SMI for other programs. By
contract, starting in fiscal year 2005, the Division allows ValueOptions to earn up
to 4 percent profit on service revenue within each major program—Medicaid,
KidsCare, and other contract monies.1 Within each of these major programs,
though, ValueOptions can use SMI monies for other categories within the same
program. For example, it can use SMI Medicaid funds for other Medicaid
funding categories, as allowed by contract, such as children’s programs or adult
substance abuse programs.2 Specifically, in fiscal years 2002 through 2004,
ValueOptions used a total of $21.4 million of Medicaid and KidsCare SMI
revenues for other Medicaid and KidsCare programs.3 However, the Legislature
appropriated these monies for use in SMI programs, with annual increases from
fiscal years 2002 through 2004 intended to address requirements of the Arnold
v. Sarn lawsuit.
In addition to using SMI monies to offset other program losses, ValueOptions
has used these monies disproportionately to earn its allowed profits. For
example, as allowed by contract, during fiscal years 2002 through 2004,
ValueOptions used net income it earned from SMI Medicaid monies to offset
losses in other Medicaid programs. The most significant offset occurred in fiscal
year 2004, when it used $15.8 million from SMI Medicaid monies to offset $9.7
million in other Medicaid programs’ losses. ValueOptions had losses totaling $6
million in its children’s Medicaid programs and $3.7 million in non-SMI adult
Medicaid programs that year. Still, it earned approximately $6.1 million in total
Medicaid profits entirely from Medicaid SMI monies, including service profits of
$6 million, which represented 2.17 percent of Medicaid service revenue. This
was below the fiscal year 2004 contractually allowed profit of 5 percent. In fiscal
year 2005, ValueOptions did not use SMI Medicaid monies to offset losses in
other Medicaid programs, and it again complied with contractual limits on
service profits.
Given that the Legislature has increased funding to provide more SMI services
and meet lawsuit requirements, the Division should consider including a
provision in its RBHA contract that would limit the use of excess SMI revenues
to make up for losses in other programs. If the Legislature wants to ensure that
its SMI appropriations are used to provide services only to adults with SMI, it
may wish to consider statutorily limiting the use of these monies similar to the
statutory limits it has placed on appropriations for children’s behavioral health
programs.
Office of the Auditor General
page v
1 Service revenues represent total contract revenues less 7.5 percent allowed for administrative expenses, or 92.5 percent
of each program fund’s total contract revenues. Starting in fiscal year 2005, allowable service profits equal 4 percent of
total service revenues. Before fiscal year 2005, the profit limit was 5 percent of these revenues.
2 This report uses the term “program” throughout the report when referring to the three major funding categories into which
behavioral health services monies are categorized—Medicaid, KidsCare, and Other Contract Monies. The use of the term
“program” represents the same thing as the term “funding category.”
3 Auditors’ analysis of division profit/risk corridor analysis reports for fiscal years 2002, 2003, and 2004 showed SMI
Medicaid and KidsCare profits of $7.5 million, $6.9 million, and $7 million, respectively, were used for other Medicaid and
KidsCare programs. Division reports are based on ValueOptions’ audited financial statements and reflect accounting
adjustments for timing and other factors.
Better oversight needed of service level provided (see
pages 41 through 46)
The Division should take steps to strengthen its contractual requirements in order to
better ensure that ValueOptions delivers sufficient services to adults with SMI. Under
the State’s RBHA contract, ValueOptions is required to submit electronic records
showing that it delivered services that equal at least 85 percent of the service
revenues ValueOptions received under its contract.1 ValueOptions establishes
service values in its contracts with its subcontractors and reports these values for the
services the subcontractors deliver. However, the Division’s contract with
ValueOptions allows ValueOptions to assign its own value for each of the services it
delivers. Because the Division does not approve the reasonableness of these service
values, the contractual requirement does not achieve its intended purpose. As of July
1, 2006, the Division has drafted revisions to its Financial Reporting Guide that would
make its monitoring more meaningful. For example, the revisions state that the
Division will use an AHCCCS-approved fee schedule to value encounters in order to
determine if the 85 percent requirement has been met. Division management reports
it is considering further revisions, such as adding a fixed percentage to the fee
schedule for purposes of valuing encounters.
Auditors compared the values that ValueOptions reported to the Division for services
it delivered itself with values ValueOptions reported it paid to its subcontractors for
the same types of services, and also with the amounts allowed in an AHCCCS-approved
fee schedule the State uses when it pays providers directly on a fee-for-service
basis. ValueOptions often assigned much higher values to its services.
Auditors’ analysis of the Division’s fiscal year 2005 encounter data concluded that
ValueOptions valued its services at approximately 99 percent higher than what it
would have if it had been using the State’s fee-for-service schedule.2 ValueOptions
officials have explained that its costs are high due to contractual and Arnold v. Sarn
lawsuit requirements, and therefore the values for the services it provided are higher
than the values it has established for the same services provided by its
subcontractors and the fee-for-service schedule. However, because the Division’s
contract with ValueOptions does not require ValueOptions to support its service
values with a fiscally sound analysis, the Division cannot determine whether the
service values are reasonable in light of ValueOptions’ costs. To make the service
level requirement effective, the Division should continue its efforts to establish a
process for assigning appropriate values to services.
1 This same requirement is included in the Division’s contracts with the RBHAs that serve other areas of the State.
2 Auditors’ analysis included encounters for services delivered during fiscal year 2005 that were submitted to the Division
as of November 2005. In addition, auditors only analyzed encounters approved by the Division, with fees that were
updated and approved by AHCCCS for fiscal year 2006.
State of Arizona
page vi
Other Pertinent Information (see pages 47 through 48)
As part of the audit, auditors gathered other pertinent information regarding the
administrative expenses associated with ValueOptions’ Arizona operations.
ValueOptions’ overall administrative expenses totaled approximately $37.2 million in
fiscal year 2005, and substantially complied with the Division’s requirement limiting
administrative expenses to 7.5 percent of each type of contract revenue.
Office of the Auditor General
page vii
State of Arizona
page viii
Office of the Auditor General
continued
page ix
TABLE OF CONTENTS
1
13
13
15
19
19
22
25
29
31
31
32
35
36
39
41
41
42
46
Introduction & Background
Finding 1: SMI monies fund a diverse range of services in
Maricopa County
ValueOptions received about half of State’s behavioral health funding
Largest category of adult SMI services is support, including case
management
Finding 2: Division should strengthen focus on outcomes
Limited focus to date on what system expenditures accomplish
Requirements may impede implementation of recovery model
To effectively implement recovery model, Division must focus on
measuring outcomes
Recommendations
Finding 3: Division can improve financial oversight and
limit use of SMI monies
Monitoring of solvency appears adequate
Division oversees spending in multiple ways
Audit results demonstrate need for additional oversight
Additional spending restrictions should be considered
Recommendations
Finding 4: Better oversight needed of service level
provided
Data used to monitor services and determine funding needs
Monitoring system does not achieve its intended purpose
Recommendations
State of Arizona
TABLE OF CONTENTS
page x
47
a-i
iii
5
34
44
47
3
7
continued
Other Pertinent Information
Appendix A
Agency Response
Tables:
1 ValueOptions’ SMI Expenses
By Type of Service Delivered
Fiscal Year 2005
(Unaudited)
2 ValueOptions’ Schedule of SMI Service Revenues and Expenses
Fiscal Years 2004 through 2006
3 ValueOptions’ Compliance with Service Profits Limit
By Program Fund Category
Fiscal Year 2005
(Unaudited)
4 Comparison of Selected Hourly Encounter Values Between ValueOptions,
ValueOptions’ Subcontractors, and AHCCCS Fee-for-Service Schedule
Fiscal Year 2005
5 ValueOptions’ Schedule of Administrative Expenses by Category
Fiscal Year 2005
(Unaudited)
Figures:
1 SMI Enrollment
In Maricopa County and Other Regions in Arizona
Fiscal Years 2001 through 2005
2 Arizona Behavioral Health Services Funding (All Populations)
Fiscal Years 2001 through 2005
(Unaudited)
Office of the Auditor General
TABLE OF CONTENTS
page xi
concluded
8
14
16
37
38
Figures: (Concl’d)
3 ValueOptions’ SMI Revenues and Enrollment
Fiscal Years 2001 through 2005
4 Flow of Sources and Distributions of
Behavioral Health Services Monies in Arizona
Fiscal Year 2005
In Millions
(Unaudited)
5 ValueOptions’ SMI Expenses by Types of Services Delivered
Fiscal Year 2005
(Unaudited)
6 Legislative Appropriations for
Behavioral Health Services for Adults with SMI
Fiscal Years 2002 through 2007
7 ValueOptions’ Medicaid Programs Losses and Profits
In Millions of Dollars
Fiscal Years 2002 through 2005
(Unaudited)
State of Arizona
page xii
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The Office of the Auditor General has conducted a special audit of the delivery of
behavioral health services to adults with serious mental illness (SMI) in Maricopa
County pursuant to Laws 2005, Chapter 256, Section 1. The audit was conducted
under the authority vested in the Auditor General by Arizona Revised Statutes (A.R.S.)
§41-1279.03.
Serious mental illness as defined in Arizona
Serious mental illness (SMI) is not a specific mental disorder, but a designation used
by states and the federal government. In Arizona, state laws and the Department of
Health Services’ Division of Behavioral Health Service’s (Division) policy define who
Division’s SMI Eligibility Determination Policy
Eligibility determination for SMI status in Arizona requires having a qualifying psychiatric diagnosis and
a functional impairment as a result of the qualifying diagnosis, as described below:
Qualifying Mental Disorders and Diagnoses
More than 70 standardized psychiatric diagnoses are considered “qualifying SMI diagnoses” in Arizona.
Division policy categorizes them into seven disorders, specifically:
􀁺􇩐 Psychotic disorders 􀁺􇩂 Bipolar disorders
􀁺􇩏 Obsessive-compulsive disorder 􀁺􇩍 Major depression
􀁺􇩏 Other mood disorders 􀁺􇩁 Anxiety disorders
􀁺􇩐 Personality disorders
Not all standardized diagnoses are considered “qualifying diagnoses” for SMI determination. For
example, antisocial personality disorder, which is one of several specific personality disorder diagnoses,
does not qualify for SMI status in Arizona.
Functional Impairment Categories
In addition to a qualifying diagnosis, a person must have a functional impairment as a result of the
diagnosis. Dysfunction should be present for at least 12 months, or at least 6 months with expected
continuation for another 6 months. Impairment must be present in one or more of four impairment
categories, as follows:
􀁺􇩉 Inability to live in an independent or family 􀁺􇩒 Risk of serious harm to self or others
setting without supervision 􀁺􇩉 Inability to perform in specific roles,
􀁺􇩒 Risk of deterioration for example, in school or work
can obtain legal status as an adult with SMI and thereby be entitled to a wide range
of services paid for by the State using Medicaid, KidsCare, State General Fund
monies, and federal grants, and other revenue sources. To obtain SMI designation in
Arizona, a person must be at least 18 years old and have a qualifying psychiatric
diagnosis and resulting functional impairment as determined by a licensed
psychiatrist, psychologist, or nurse practitioner (see text box, page 1). The Division’s
SMI determination policy identifies more than 70 standardized psychiatric diagnoses
from The Diagnostic and Statistical Manual of Mental Disorders as “qualifying SMI
diagnoses.”1 Arizona’s SMI definition is very similar to the federal definition used by
the U.S. Department of Health and Human Services, Substance Abuse and Mental
Health Services Administration.
SMI enrollment in Maricopa County exceeds 18,000
As of fiscal year 2005, the Division reported that more than 18,000 adults with SMI
were enrolled to receive services in Maricopa County, out of a state-wide enrollment
of nearly 31,500 adults. Figure 1 (see page 3) presents state-wide and Maricopa
County’s SMI enrollment trends from fiscal years 2001 through 2005. As shown in
Figure 1, Maricopa County’s total enrollment increased from approximately 13,000 to
approximately 18,000 from fiscal years 2001 to 2005. During all 5 fiscal years,
Maricopa County accounted for the majority of state-wide enrollment.
Contractor administers system
The Department of Health Services contracts with a private company, VO of Arizona,
Inc. (ValueOptions), to administer a behavioral health system in Maricopa County for
adults with SMI, as well as for several other population groups.2 The Division’s duties
include ensuring that ValueOptions complies with its contractual requirements and
overseeing the service system. ValueOptions delivers case management and some
other services directly, and also subcontracts with other service providers.
Division of Behavioral Health Services oversees the contracted
system—The Division does not provide any direct services except at Arizona
State Hospital, but instead contracts with Regional Behavioral Health Authorities
(RBHAs) to administer services in specific geographic service areas within the
State. Arizona established the RBHA system in 1992. RBHAs are managed-care
State of Arizona
page 2
1 Psychiatric diagnoses are standardized and published in The Diagnostic and Statistical Manual of Mental Disorders,
Fourth Edition (DSM-IV), published by the American Psychiatric Association. It is the official reference guide that
psychiatrists and other qualified clinicians use to identify mental disorders and psychiatric diagnoses.
2 The State contracts with VO of Arizona, Inc., an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned
subsidiary of Virginia-based FHC Health Systems. In addition to VO of Arizona, Inc., ValueOptions, Inc. has affiliates that
manage behavioral health systems in several states, including Colorado, Florida, Massachusetts, New Jersey, New
Mexico, North Carolina, and Texas.
Office of the Auditor General
page 3
organizations that the State pays in advance through capitated payment
arrangements.1
The Division is primarily an oversight agency. Many of the Division’s oversight
obligations stem from federal Medicaid requirements reflected in its contract with
the Arizona Health Care Cost Containment System (AHCCCS), Arizona’s Medicaid
agency. Other requirements derive from state statutes and administrative rules. In
Maricopa County, the Division’s oversight also emphasizes compliance with Arnold
v. Sarn lawsuit requirements.The class action lawsuit was filed in 1981 on behalf of
people with serious mental illness in Maricopa County alleging that the State and
the County had not established a comprehensive community mental health
system consistent with Arizona state law. The Superior Court and Arizona Supreme
Court found in favor of the plaintiffs in 1986 and 1989, respectively, and in 1991,
the Court approved The Blueprint: Implementing Services to the Seriously Mentally
Ill (Blueprint) that set forth required system changes. The court approved an exit
stipulation in 1995, and then a supplemental agreement in 1998, that set forth
additional terms for the State to meet. (See Appendix A for summary of Arnold v.
Sarn activities.)
1 The Department of Health Services contracts with four RBHAs to serve the State’s six regions. In addition to ValueOptions
in the Maricopa County region, the Northern Arizona Regional Behavioral Health Authority (NARBHA) serves the northern
region, Cenpatico Behavioral Health serves the Pinal-Gila and Yuma-La Paz regions, and Community Partnership of
Southern Arizona (CPSA) serves the Pima County and southeast regions. In addition, the Department contracts with four
tribal contractors to serve the Gila River, Colorado River, Navajo Nation, and Pascua Yaqui communities.
31,473
25,784
Adults with SMI—Maricopa County Adults with SMI—other regions
18,138
13,335
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2001 2002 2003 2004 2005
Fiscal Year
13,095
12,689
Source: Auditor General staff analysis of number of consumers served as presented in the annual reports for the Arizona Department of
Health Services/Division of Behavioral Health Services and the Arizona State Hospital for fiscal years 2001 through 2005, and
enrollment data reported by ValueOptions for the end of the month of June for 2001 through 2005.
Figure 1: SMI Enrollment
In Maricopa County and Other Regions in Arizona
Fiscal Years 2001 through 20051
1 Due to division information system changes in fiscal years 2003 and 2004, the state-wide totals for those
years may be incomplete.
State of Arizona
page 4
The Division monitors RBHA contract compliance and financial performance;
conducts quality assurance activities, such as performance improvement,
research, and data dissemination; and handles grievances and appeals. In
addition, a clinical services division that consists of several bureaus provides
technical assistance and guidance for RBHAs and service providers related to
best practices in clinical care for adults, children, and substance abusers. In fiscal
year 2006, the Arizona Legislature appropriated a total of 122 FTE positions to the
Department of Health Services to oversee Arizona’s public behavioral health
system. The number of FTE has not significantly changed since fiscal year 2004,
when the number dropped to 120 FTE from 130 FTE in fiscal year 2003.
ValueOptions serves Maricopa County—ValueOptions has operated as
Maricopa County’s RBHA since 1998. ValueOptions, a subsidiary of a Virginia-based
company, is the second RBHA to serve Maricopa County, and it was the first
for-profit company to receive a state RBHA contract. The Department entered into
its most recent 3-year contract with ValueOptions on July 1, 2004. As of March
2006, ValueOptions reported having approximately 2,000 full- and part-time
positions consisting of 473 administrative and 1,525 clinical operations positions
in Arizona.
ValueOptions’ Maricopa County operations include a corporate office, an
intake/evaluation center, intake/assessment and crisis hotline call centers located
in Phoenix, and 23 direct care clinics located throughout the County. ValueOptions
delivers SMI services through a combination of its intake, assessment, and crisis
services, its direct care clinics, and subcontracted service providers. (See text box
for types of services, and Finding 1, pages 13 through 17, for specific definitions.)
􀁺􇩖 ValueOptions direct care clinics: ValueOptions operates 23 direct care sites
located throughout Maricopa County. ValueOptions enrolls each SMI
consumer in one of these direct care clinics. Every clinic has clinical teams
composed of physicians, nurses, certified clinicians, case managers, and
other mental health support staff. (See Finding 2, pages 19 through 29, for
description of a clinical team.) ValueOptions’ case management strategic
plan, which was developed to meet court requirements, states that the most
common clinical team (supportive treatment) should have a caseload no
greater than 30 consumers per case manager. Some teams, called assertive
case management teams, should have caseloads no greater than 12
consumers per case manager in order to provide more intensive services.
􀁺􇩓 Subcontracted services: ValueOptions contracts with more than 100 service
providers who provide both inpatient and outpatient services for adults with
SMI. For example, ValueOptions contracts with hospitals for inpatient services
and human service agencies for treatment services such as counseling and
therapy. ValueOptions’ officials report that they also co-locate some
subcontractor employees at its clinics to improve access for its consumers.
Under its contract with the Division, ValueOptions must comply with
requirements associated with the Arnold v. Sarn lawsuit. For example, Arnold
v. Sarn’s 1991 Blueprint requires that for Maricopa County, only one entity
provides case management services for adults with SMI. Currently,
SMI Service Examples
􀁺􇩃 Case management
􀁺􇩔 Therapy and counseling
􀁺􇩐 Peer support
􀁺􇩃 Crisis intervention
􀁺􇩉 Inpatient services
􀁺􇩍 Medication
􀁺􇩒 Rehabilitation
􀁺􇩄 Day programs
􀁺􇩈 Housing and housing support
􀁺􇩒 Residential services
Office of the Auditor General
page 5
ValueOptions delivers adult case management directly through its clinics.
However, the Division is examining the court order that requires case
management through a single entity to determine whether the current
structure is the most effective way to serve adults with SMI. According to
ValueOptions officials, ValueOptions would support a change to a contract
with a network of contractors for these services, similar to the way case
management is provided in Pima County. (See Appendix A for summary of
Arnold v. Sarn activities.)
As indicated in Table 2, the largest source of ValueOptions’ SMI service revenues is
contract revenue. In addition to state contract revenue, ValueOptions receives other
revenues not related to its contract with the Division, including revenues from third
parties such as Medicare and other insurers. SMI revenues increased by $4 million
Table 2: ValueOptions’ Schedule of SMI Service Revenues and Expenses
Fiscal Years 2004 through 2006
2004 2005 2006
(Actual) (Actual) (Estimate)
Revenues:
Contract Division of Behavioral Health Services revenues $260,476,899 $264,279,151 $300,992,213
Medicare recoveries 443,125 582,704 595,556
Other insurance recoveries 58,340 48,531 93,362
Patient fees (copayments) 7,818 5,057 5,478
Total revenues 260,986,182 264,915,443 301,686,609
Expenses:
Program Services—
Treatment 12,518,043 13,749,414 17,013,324
Rehabilitation 12,479,494 13,910,474 19,493,083
Medical1 8,956,964 12,703,965 17,993,360
Support (including case management)2 89,815,497 101,032,099 121,537,114
Crisis intervention 6,666,818 9,872,859 9,999,689
Inpatient 25,663,299 26,454,083 29,036,144
Residential 17,134,361 17,795,122 16,948,380
Behavioral health day program 3,899,870 6,125,640 4,280,221
Medication 40,216,229 41,080,986 38,738,082
Other 4,833,541 478,255 50,227
Total program services expenses 222,184,116 243,202,897 275,089,624
Administrative Expenses—
Salaries and employee benefits 5,162,391 7,234,547 8,032,378
Professional and outside services 1,417,647 3,803,185 1,976,050
Travel and other 12,318,930 7,895,288 9,897,180
Depreciation 507,360 958,783 1,566,863
Total administrative expenses 19,406,328 19,891,803 21,472,471
Income tax provisions 7,682,557 723,670 2,037,225
Total expenses 249,272,390 263,818,370 298,599,320
Net income $ 11,713,181 $ 1,097,073 $ 3,087,289
1 According to ValueOptions, medical expenses have increased significantly since fiscal year 2004 due to an increased utilization of services. These
services include medication services, medical management, laboratory, radiology/medical imaging, and electro-convulsive therapy services.
2 Support (including case management) is expected to increase from the fiscal year 2005 total of $101 million to $121.5 million in fiscal year 2006. In fiscal
year 2005, when these expenses increased from fiscal year 2004, VO of Arizona, Inc. reported adding more than 400 new case manager and other
positions in its clinics. According to VO of Arizona, Inc. personnel, this staff was added primarily in response to deficiencies identified in the 2004
Independent Review by the Office of the Monitor.
Source: Auditor General staff analysis of the Arizona Division of ValueOptions, Inc.’s Financial Statements and Supplemental
Schedules for fiscal year 2004 and VO of Arizona, Inc.’s Financial Statements and Supplemental Schedules for fiscal year
2005, audited by an independent CPA firm, and ValueOptions-prepared estimates for fiscal year 2006.
between fiscal years 2004 and 2005, while SMI expenses increased more
significantly, which resulted in ValueOptions earning less net income from the
SMI program in fiscal year 2005. Annual service-related costs per SMI enrollee in
Maricopa County increased by approximately $300 between 2004 and 2005 (see
text box). ValueOptions expected total SMI revenues and expenses to increase
in fiscal year 2006. See Finding 1 (see pages 13 through 17) for more information
on the Division’s distribution of behavioral health monies to ValueOptions, and how
much of ValueOptions’ SMI revenues were spent in its direct care clinics (in-house
expenses) compared to its subcontracted service providers.
Arizona has well-funded mental health system
Arizona, once considered at the bottom rung of the ladder in state mental health
spending, has now risen to within the top ten among the states. Specifically, in
November 2005, the National Association of State Mental Health Directors Research
Institute ranked Arizona as tenth in overall mental health expenditures, and seventh
in per-capita mental health expenditures (based on 2003 expenditure data).1
Arizona’s behavioral health system is funded through a combination of federal, state,
and other government funding sources. Specifically:
􀁺􇩍 Medicaid: Medicaid monies consist of a blend of federal and state monies. The
Department of Health Services receives these monies from AHCCCS. The
states appropriate monies for their Medicaid programs and the federal
government matches those monies. The Arizona Legislature appropriates one-third
of Arizona’s Medicaid funding and the federal match accounts for the
remaining two-thirds.
􀁺􇩋 KidsCare: The Department of Health Services also receives KidsCare monies
from AHCCCS. Like Medicaid, KidsCare monies also consist of a blend of
federal and state monies. The Arizona Legislature appropriates state funding,
and the federal government matches the state monies. In general, KidsCare
pays for medical and behavioral health services for youths up to age 19, as well
as for the parents of the youths enrolled in KidsCare (called “KidsCare Parents”)
who do not qualify for Medicaid. Some 18-year-olds, and adults enrolled in the
KidsCare Parents program who are determined to have a serious mental illness,
can have their behavioral health services paid with KidsCare monies.
􀁺􇩓 State General Fund appropriations: In addition to appropriations for the state
match portion of Medicaid and KidsCare monies, the Arizona Legislature
appropriates General Fund monies to pay for services not covered by Medicaid.
For example, these monies can be used to pay for room and board for Medicaid
State of Arizona
page 6
1 The Institute did not compare how the states ranked with regard to funding for only adults with SMI.
Annual Service-Related Costs
Per SMI Enrollee in Maricopa County
2004 $13,137
2005 $13,408
enrollees, or to pay for services for people who do not qualify for Medicaid or
KidsCare, but who otherwise qualify for behavioral health services.1
􀁺􇩏 Other government funding: Other government funding consists of revenues
from federal block grants, county funds, and other local government monies,
and non-General Fund state appropriations. For example, in 2000 the
Legislature appropriated more than $40 million in one-time monies from the
State’s tobacco litigation settlement monies to pay for housing, vocational
rehabilitation, and other recovery support services for adults with SMI.2 Other
sources of funding include federal block grants, intergovernmental agreements,
and monies from local governments.
As shown in Figure 2, Arizona’s total behavioral health funding—including funding for
children’s services, general mental health, substance abuse, and division
administration as well as funding for adults with SMI—has more than doubled
between fiscal years 2001 and 2005, with much of the increase being paid for by
increased Medicaid revenues. Two factors help explain this increase. First, in 2000,
Arizona voters approved Proposition 204, expanding eligibility for Medicaid starting
Office of the Auditor General
page 7
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Medicaid KidsCare State General Fund Other Government
Millions
2001 2002 2003 2004 2005
1 General Fund and other government monies are limited and are not considered entitlement monies like Medicaid and
KidsCare monies. The Division requires the RBHAs and tribal contractors to set priorities for how these limited monies
will be spent within their respective service regions.
2 The program was more commonly known as the HB2003 program for the original legislation that authorized the one-time
funding. See Auditor General Report No. 04-03 for additional information on the HB2003 program and the SMI programs
and services developed with one-time funding from tobacco litigation settlement monies.
Source: Auditor General staff analysis of state-wide behavioral health services funding for fiscal years 2001 through 2005 as presented in
the annual reports for the Arizona Department of Health Services Division of Behavioral Health Services and Arizona State Hospital
for fiscal years 2001 through 2005.
Figure 2: Arizona Behavioral Health Services Funding (All Populations)
Fiscal Years 2001 through 2005
(Unaudited)
in 2001. The proposition expanded income eligibility requirements up to 100 percent
of the federal poverty level, greatly increasing Arizona’s Medicaid enrollment. This
change expanded Medicaid spending significantly. Starting in fiscal year 2002, the
Division received additional Medicaid monies (both state and federal matching
monies) to provide services to people made eligible by the Proposition 204
expansion. Population growth in Arizona also played a factor as it also helped
increase the number of people eligible for Medicaid-funded services in Arizona. At
the same time the eligibility expansion took effect, Arizona began covering a broader
array of behavioral health services in its Medicaid program. All of these changes
contributed to increased uses of Medicaid monies to pay for behavioral health
services.
ValueOptions’ SMI revenues compared to adults served
Similar to state-wide mental health funding, ValueOptions also received more funding
to serve adults with SMI between fiscal years 2001 through 2005. Figure 3 compares
the growth in ValueOptions’ SMI service revenues to SMI enrollment for fiscal years
2001 through 2005. SMI revenues increased significantly between 2001 and 2003,
primarily due to the effects of increased Medicaid funding. Figure 3 shows that
although ValueOptions was receiving more revenues to serve adults with SMI
between fiscal years 2001 through 2004, it was serving more people during these
State of Arizona
page 8
$122.2 $193.4 $239.8 $261.0 $264.9
13,095
15,339
14,279
18,138
$0
$50
$100
$150
$200
$250
$300
2001 2002 2003 2004 2005
Fiscal Year
Revenues (Millions) 0
5
10
15
20
25
Enrollment (Thousands)
Revenues Enrollment
Source: Auditor General staff analysis of the Arizona Division of ValueOptions, Inc.'s Financial Statements
and Supplemental Schedules for fiscal years 2001 through 2004, VO of Arizona, Inc.'s Financial
Statements and Supplemental Schedules for fiscal year 2005, audited by an independent CPA firm,
and the number of consumers served as reported by ValueOptions in its monthly enrollment reports.
16,913
Figure 3: ValueOptions’ SMI Revenues and Enrollment
Fiscal Years 2001 through 2005
years, with annual increases of over 1,000 people. According to ValueOptions
reports, ValueOptions served more than 18,000 adults with SMI in fiscal year 2005,
and it did so with approximately the same amount of revenues as it received in fiscal
year 2004.
Scope and methodology
Laws 2005, Chapter 256, Section 1, requires the Office of the Auditor General to
assess the Department’s delivery of behavioral health services to adults with serious
mental illness in Maricopa County. This audit focuses on the following main topics:
􀁺􇩈 How the money for adults with SMI is being spent in Maricopa County.
􀁺􇩗 Whether there is an adequate focus on the services’ outcomes.
􀁺􇩔 The use of SMI monies and how effectively the Division conducts financial
oversight.
􀁺􇩈 How effectively the Division reviews the levels and costs of services reported by
ValueOptions and its subcontractors.
The audit contains four findings and associated recommendations:
􀁺􇩉 In fiscal year 2005, ValueOptions spent the vast majority of SMI funding on a
wide variety of services, with approximately 40 percent spent on support
services including case management.
􀁺􇩔 The Division should strengthen its focus on consumer outcomes to better
account for what its expenditures accomplish.
􀁺􇩁 Although many of the Division’s approaches for monitoring solvency and
expenditures are working reasonably, the Division can strengthen its
requirements to provide greater assurance that monies are being spent
appropriately.
􀁺􇩒 Requirements designed to ensure that SMI funding is being spent on providing
services to consumers need to be strengthened.
In addition, this report contains Other Pertinent Information regarding ValueOptions’
overall fiscal year 2005 administrative expenses (see pages 47 through 48).
Various methods were used to study the issues addressed in this audit. General
methods included interviews with division officials and staff, and ValueOptions’
executive management team members and other staff. Auditors also reviewed
Arizona Revised Statutes, Administrative Rules, and the Division’s policies and
Office of the Auditor General
page 9
procedures as well as information about its goals, objectives, and performance
measures. In addition, auditors reviewed provisions in the State’s contract with the
Maricopa County Regional Behavioral Health Authority and various court documents
associated with Arnold v. Sarn such as the 1986 judgment, 1989 Supreme Court
opinion, 1991 Blueprint, 1995 exit stipulation, 1998 supplemental agreement, the
2004 and 2005 independent review reports, and more recent related documentation.
Auditors also used specific methods to develop each finding:
􀁺􇩄 Determining how service dollars for adults with SMI were spent in fiscal year
2005—To establish service categories, auditors reviewed the Division’s Covered
Services Guide, which describes the various types of covered behavioral health
services. To understand how monies flow in the system and how monies were
spent, auditors reviewed, collected, and analyzed information from a number of
sources, including AHCCCS’ contract with the Division; financial schedules the
Division reported in its Annual Report for fiscal year 2005; audited financial
statements of VO of Arizona, Inc., for fiscal year 2005; and an electronic
download of the data that external auditors PricewaterhouseCoopers used in
the fiscal year 2005 audit of VO of Arizona, Inc.’s financial statements.1
􀁺􇩄 Determining what services are accomplishing among adults with SMI who
receive them—To understand the reasons for service provision problems
experienced by some adults with SMI in Maricopa County, auditors conducted
ten case studies of consumers whose needs were deemed as “not met” by the
Arnold v. Sarn Court Monitor in 2005. The case studies consisted of client file
reviews, including reviews of client progress notes, interviews with case
managers, reviews of client demographic and service data (encounters), and
several interviews with the court monitor.
To understand issues that affect service delivery in Maricopa County, auditors
obtained the input of behavioral health experts and others who are familiar with
service planning and provision through a number of activities, including:
􀁼􇱔 Two focus groups consisting of division and ValueOptions clinical advisors
who are experts in behavioral health services assigned to clinics to provide
guidance to staff;
􀁼􇱁 An online Web-based discussion with 14 behavioral health experts, and
interviews with an additional 5 behavioral health experts with questions
similar to those posed to the Web-based discussion participants.
Seventeen of the experts’ expertise is based on local
experience/perspective, and two of them have expertise based on a
national perspective/experience; and
􀁼􇱏 Observation of a Boston University Recovery Training overview given by a
behavioral health expert, and attendance at division oversight meetings
State of Arizona
page 10
1 Although it is more commonly known as ValueOptions, VO of Arizona, Inc. is the legal name of the Maricopa County
RBHA. VO of Arizona, Inc. is an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned subsidiary of Virginia-based
FHC Health Systems.
with ValueOptions and parties involved with the Arnold v. Sarn lawsuit,
community advocate briefing meetings led by the ValueOptions’
administrators, and ValueOptions’ clinical team meetings.
Finally, to identify best practices in measuring behavioral health outcomes and
recovery in managed care systems, and to understand the Division’s quality
management activities and requirements, auditors reviewed literature and
reports such as journal articles and literature related to measuring recovery
outcomes and incorporating outcome measurement into government oversight
of managed care entities; provisions in the Division’s contracts with AHCCCS
and ValueOptions related to performance measures and financial incentives;
Boston University reports on Individual Service Plan (ISP) production and
training methods; the 2003 and 2004 Arizona Department of Health Services
Independent Case Reviews conducted by an independent third party; and the
Division’s 2003 ADHS Consumer Survey State Report, which is its most recent.
􀁺􇩁 Assessing the Division’s effectiveness in providing financial oversight of funding
for adults with SMI in Maricopa County—To assess the adequacy of the
Division’s financial oversight activities, auditors reviewed the requirements set
forth in AHCCCS’ contract with the Division, as well as the Division’s contract
with VO of Arizona, Inc; obtained and reviewed AHCCCS standards related to
financial oversight in a managed behavioral healthcare system; obtained and
reviewed the Division’s analysis of ValueOptions’ compliance with financial
standards; and reviewed ValueOptions’ audited financial reports and the
findings of the external auditors’ fiscal year 2005 OMB A-133 audits of VO of
Arizona, Inc.
􀁺􇩁 Assessing the adequacy of the Division’s oversight of service data (encounters)
and service utilization—To assess the adequacy of the Division’s oversight of
level of services delivered through encounter data, auditors obtained an
electronic download of fiscal year 2005 data that VO of Arizona, Inc. reported to
the Division. Auditors analyzed a subset of this data comprising more than
814,000 electronic service records reported to be valued at $21.1 million
associated with ValueOptions’ in-house clinical and subcontracted services. The
analysis included service records where the service was delivered in fiscal year
2005, the service was delivered to a consumer designated as SMI, the Division’s
computer system had received the record by November 2005 and marked the
record approved, and the type of service was listed on AHCCCS’ fee schedule
with a rate that was updated as of July 15, 2005. Auditors analyzed the
encounter data to compare the cost values of services provided by
ValueOptions in-house to the cost values of the services provided by
ValueOptions’ subcontractors and the State’s fee-for-service schedule.
􀁺􇩏 Other Pertinent Information—To gather information on ValueOptions’ fiscal year
2005 administrative expenses, auditors reviewed VO of Arizona, Inc.’s audited
Office of the Auditor General
page 11
financial statements for fiscal year 2005, and an electronic download of the data
that external auditors PricewaterhouseCoopers used in its fiscal year 2005 audit
of VO of Arizona, Inc.’s financial statements.
􀁺􇩉 Introduction and Background and Appendix A—To document the definition of
serious mental illness and trend information on the number of adults being
served in Maricopa County, auditors documented definitions set forth in federal
and state laws and the Division’s SMI determination policy, and information on
the number of clients served as reported in the Division’s annual reports for fiscal
years 2000 through 2005 and ValueOptions’ enrollment data for the same
timeframe. To document the Division’s responsibilities and the responsibilities of
its contractor, VO of Arizona, Inc., auditors reviewed several sources, including
the Division’s annual reports; unaudited information from the Division’s Web site
and other agency-prepared documents; unaudited information from AHCCCS’
Web site and the AHCCCS contract with the Department of Health Services; and
VO of Arizona, Inc.’s unaudited company-prepared information, including
information published on VO of Arizona, Inc. and ValueOptions, Inc.’s Web
sites.To understand how SMI monies were spent in fiscal years 2004 and 2005,
and projected 2006 expenses, auditors reviewed audited financial statements of
the Arizona Division of ValueOptions, Inc. for fiscal year 2004, and VO of Arizona,
Inc.’s audited financial statements for fiscal year 2005, and its 2006 estimates.1
To document mental health expenditure trends in Arizona, auditors analyzed
information reported in the Division’s annual reports for fiscal years 2001 through
2005, and information reported in a November 2005 report published by the
National Association of State Mental Health Program Directors Research
Institute. To compare the growth in ValueOptions’ SMI service revenues to SMI
enrollment for fiscal years 2001 through 2005, auditors analyzed information
reported in audited financial statements for the Arizona Division of ValueOptions,
Inc. (for fiscal years 2001 through 2004) and VO of Arizona, Inc.’s financial
statements for fiscal year 2005, and compared this information to the number of
SMI enrollees served, as reported by ValueOptions for fiscal years 2001 through
2005.
To develop Appendix A, auditors reviewed and analyzed Arnold v. Sarn court
documents previously mentioned.
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director of the Department
of Health Services, her staff at the Division of Behavioral Health Services, and
ValueOptions for their cooperation and assistance throughout the audit.
State of Arizona
page 12
1 VO of Arizona, Inc. was officially incorporated as an Arizona-based corporation in July 2004 after the start of fiscal year
2005, which began July 1, 2004 and ended June 30, 2005.
Office of the Auditor General
page 13
SMI monies fund a diverse range of services in
Maricopa County
In Maricopa County, most monies appropriated for SMI are spent primarily on a
diverse range of services. Of the total revenues ValueOptions received during fiscal
year 2005, nearly 50 percent went to provide services for adults with SMI, 40 percent
went to provide services to children and other adults, and slightly more than 10
percent went for ValueOptions’ administrative costs, taxes, and profit. Among
services for adults with SMI—the primary focus of this audit—support (which
includes case management services such as helping identify needed resources and
monitoring delivery of other services) accounted for about two-fifths of the
expenditures. The rest went to such services as medication, inpatient and residential
care, rehabilitation, and crisis intervention. ValueOptions personnel provided most of
the case management, other support, and crisis intervention services, while
subcontractors provided nearly all of the other services.
ValueOptions received about half of State’s behavioral
health funding
In fiscal year 2005, ValueOptions received about half of the State’s behavioral health
monies and used about half of these revenues to provide services to adults with SMI.
The overall flow of monies through the system is shown in Figure 4 (see page 14). As
the figure shows, a combination of federal, state, and county monies fund the
behavioral health system in Arizona. For fiscal year 2005, the Division received a total
of $920.8 million to oversee and contract for behavioral health services in Arizona.
ValueOptions received $489.4 million for programs in Maricopa County.1 Of this
amount, ValueOptions used $243.2 million for programs for adults with SMI and
$196.4 million to provide other services, of which 53 percent were for children.
Nearly all ValueOptions’ Arizona revenues come from its contract with the Division. In
fiscal year 2005, ValueOptions received $2 million of revenues from other sources,
including interest and recoveries from Medicare and other insurers. In total,
FINDING 1
State of Arizona
page 14
Federal $527.0
State 350.1
County 37.4
Other 6.3
Total $920.8
State-wide Program
Distribution $920.8
Amount used to provide services to
adults with SMI $ 243.2
ValueOptions1 $489.4 Other RBHAs, tribal contractors,
and other adjustments2 $416.8
BHS
Administration $14.6
Amount used to provide
other services $ 196.4
ValueOptions
Administration $36.8
Profit 7.9
Income Taxes 5.2
Expenses for services provided by
subcontractor providers $151.7
Expenses for services provided by
ValueOptions $91.5
Figure 4: Flow of Sources and Distributions of
Behavioral Health Services Monies in Arizona
Fiscal Year 2005
In Millions
(Unaudited)
1 ValueOptions received an additional $2 million from other sources, including interest and recoveries from
Medicare and other insurers. All these monies were used for administration, profit, and income taxes.
2 The Department contracts with three other RBHAs and four tribal contractors. In addition, an insignificant
adjustment was made to account for the difference between the Division's cash basis and ValueOptions’ accrued
amounts.
Source: Auditor General staff analysis of Arizona Department of Health Services Division of Behavioral Health Services and Arizona State
Hospital Annual Report Fiscal Year 2005, an electronic file obtained from ValueOptions containing financial statement data for
fiscal year 2005, and VO of Arizona, Inc. Statement of Activities Year Ended June 30, 2005.
Office of the Auditor General
page 15
ValueOptions received $491.4 million from all sources. From all of its revenue sources,
ValueOptions earned $8.8 million in profits (1.79 percent of revenues), used $37.2
million to pay for administrative expenses (7.57 percent), and incurred $5.8 million in
income taxes associated with its Arizona operations (1.18 percent). Administrative
expenses associated with the division contract totaled $36.8 million, which is
substantially in compliance with the contractual requirement limiting administrative
expenses to 7.5 percent of each type of contract revenue. See Other Pertinent
Information (pages 47 through 48) for more information on ValueOptions’
administrative expenses.
Largest category of adult SMI services is support,
including case management
The $243.2 million for services to adults with SMI was used for many different kinds of
services. As Figure 5 (see page 16) shows, support services, which includes case
management, was by far the largest category, representing about 42 percent of total
service expenditures. ValueOptions provided most of the support services. Nearly all
of the other categories of services were provided primarily by subcontractors. The
types of services were as follows:
􀁺􇩓 Support services ($101 million)—Mainly case management services that help
consumers obtain behavioral health services via ValueOptions direct care sites
or through subcontractors. Specifically, case managers help consumers obtain
services and monitor service delivery. Other support services include respite
care, peer support, home care training, transportation, helping consumers find
resources such as housing and carrying out daily tasks such as assisting with
food preparation, and ensuring that medications are taken as prescribed.
􀁺􇩍 Medication ($41.1 million)—Prescription drugs intended to prevent, stabilize, or
improve symptoms due to a behavioral health condition or its treatment.
􀁺􇩉 Inpatient services ($26.5 million)—Inpatient detoxification and psychiatric
services delivered in hospitals and other inpatient facilities, including residential
treatment centers that provide a structured treatment setting with 24-hour
supervision, an intensive treatment program, and on-site medical services.
􀁺􇩒 Residential services ($17.8 million)—Twenty-four-hour residential services,
including structured treatment, which includes room and board, delivered in
residential facilities or supported independent living settings.
State of Arizona
page 16
􀁺􇩒 Rehabilitation services ($13.9 million)—Education, coaching, training, and other
services, including securing and maintaining employment. Services include
living skills training, cognitive rehabilitation, health promotion, and ongoing
support to help maintain employment.
􀁺􇩔 Treatment services ($13.7 million)—Counseling, therapy, assessment,
evaluation, screening, and other professional services to reduce symptoms and
promote consumer functioning.
7.5
3
79.9
6.1
11.6
13.7
13.9
17.8
26.5
38.1
21.1
1.1
2.4
$0 $20 $40 $60 $80 $100 $120
Millions
In-House Subcontractors
Medication
Inpatient
Residential
Rehabilitation
Treatment
Medical
Crisis intervention
Day programs
In-house total expenses = $91.5 million
Subcontractors' total expenses = $151.7 million1
Support (including
case management)
1 Includes an additional $500,000 of miscellaneous behavioral health services delivered by subcontractors.
Source: Auditor General staff analysis of an electronic file obtained from ValueOptions containing financial statement data for fiscal year 2005, and
VO of Arizona, Inc. Statement of Activities Year Ended June 30, 2005.
Figure 5: ValueOptions’ SMI Expenses by Types of Services Delivered
Fiscal Year 2005
(Unaudited)
􀁺􇩍 Medical services ($12.7 million)—Services to reduce a person’s symptoms and
improve or maintain functioning, including laboratory, radiology, and medical
imaging. Medical services also include medication management, which is the
review of medication effects and side effects, and adjusting the type and
dosage of prescribed medications.
􀁺􇩃 Crisis intervention services ($9.9 million)—Telephone crisis lines, mobile crisis
intervention units, and crisis services delivered at two psychiatric recovery
centers (PRCs) managed by ValueOptions.
􀁺􇩄 Day programs ($6.1 million)—Skills training and development, behavioral health
prevention/promotion, medication training and support, ongoing support to
maintain employment, and self-help/peer services to improve consumers’ ability
to function in the community.
􀁺􇩏 Other ($478,000)—Other behavioral health services include some community
housing, vocational, screening, and evaluation services. This amount includes
approximately $400,000 in Tobacco Litigation Settlement Fund monies that the
Division allocated to ValueOptions in fiscal year 2005. (See Auditor General
Report No. 04-03 for additional information on SMI community housing
developed with one-time funding from tobacco settlement monies.)
Office of the Auditor General
page 17
State of Arizona
page 18
Office of the Auditor General
page 19
Division should strengthen focus on outcomes
The Division should strengthen its focus on consumer outcomes to better account
for what expenditures on services for adults with SMI accomplish. To date, the focus
on what expenditures are accomplishing has been limited as the Division continues
to implement basic system requirements. The Division is attempting to move its
program in a results-oriented direction, in part by adopting a recovery-based model
aimed at helping people make progress. However, the Division may experience
difficulty in moving further in this direction, in large part because it must measure
numerous process requirements in order to comply with federal, state, and Arnold v.
Sarn lawsuit requirements. To strengthen its focus on consumer outcomes, the
Division should continue implementing outcome-based training, continue
developing outcome goals and measures in its quality management system and
RBHA contract, and ensure that the data it collects to measure outcomes is accurate.
In addition, the Division should consider working with Arnold v. Sarn plaintiffs to
renegotiate criteria for exiting the lawsuit.
Limited focus to date on what system
expenditures accomplish
The Division has had limited focus on whether its
expenditures are helping consumers make progress in their
recovery. Research shows that many adults with SMI can
recover, or make progress, and live personally meaningful
and fulfilling lives. Experts believe that a public mental health
system’s service planning and clinical practices should be
recovery-based (see text box). To date, there has been
limited focus on what is being accomplished through case
management and support services, including service
planning by clinical teams, or what consumer outcomes are
as a result of the services they receive. However, the Division
and ValueOptions are beginning to focus on consumer
outcomes.
FINDING 2
What Recovery Means1,2
To consumers—Being able to participate in
meaningful activities, assume responsibilities,
and/or overcome disadvantages such as
discrimination after being categorized mentally ill.
To the Division—Ensuring that the RBHAs provide
services that facilitate a consumer’s progress, and
focusing its oversight on measuring consumer
recovery as a result of those services.
1 Anthony, William A. A Recovery-Oriented Service System:
Setting Some System-Level Standards. Psychiatric
Rehabilitation Journal, Fall 2000. 159-168, Vol. 24, No. 2.
2 Anthony, William A. Recovery from Mental Illness: The
Guiding Vision of the Mental Health Service System in the
1990’s. Psychosocial Rehabilitation Journal, 1993. 11-23,
Vol. 16 No. 4.
State of Arizona
page 20
Service planning focuses on process—Behavioral health experts believe
outcome goals should determine the services provided by considering consumer
improvement when developing long-term objectives, making assessments, and
identifying needs. However, several experts and clinical advisers who participated
in auditors’ focus groups believe that the Division and ValueOptions focus on the
process of service delivery rather than the level of progress that consumers
achieve.1
One example of the emphasis on process is the recent effort to meet quotas,
which according to ValueOptions’ management, requires staff at the various clinics
to meet site-specific, monthly goals for developing individual service plans (ISPs),
which are written plans showing consumers’ needed services. To comply with
Arnold v. Sarn court agreements, consumers must have ISPs. Case reviews by the
court monitor in 2004 and 2005 found a high rate of consumers without adequate
ISPs, and since then the Division and ValueOptions have emphasized the need to
develop ISPs for consumers.
The increased emphasis on meeting ISP quotas may help clinical teams develop
the required number of ISPs, but available evidence indicates that teams may not
always create meaningful plans appropriate for consumer needs (see text box for
a listing of these needs). Boston University mental health system experts observed
ValueOptions’ clinical teams in May 2005. The Boston University experts
conducted a review at six clinics and reported that the teams had difficulty setting
personalized ISP goals and lacked the ability to identify consumer needs and
develop appropriate objectives to help consumers make progress in their
recovery. Clinical advisers in auditors’ focus groups confirmed Boston University
experts’ report that the clinical teams did not view the ISP as a planning tool to help
link consumers to needed services for long-term progress. Auditors’ review of case
files showed an example of the problem:2
􀁺􇩌 Lisa, a 58-year-old woman with a psychotic disorder, received services valued
at approximately $4,800 in fiscal year 2005. She expressed to her case
manager that she has financial problems. However, she is not ready to work,
but would like to move to a more affordable apartment. Although her ISP
reflects this goal, her case manager believes that her living situation is
adequate, and there has been little effort to help Lisa find a less expensive
place to live. According to agency rules, if the goal is appropriate, the team
should help Lisa work toward achieving it.
Clinical team efforts not adequately coordinated—Effective supervision
and clinical team practices are important to implementing policies focused on
consumer progress, according to behavioral health experts. These experts believe
1 Behavioral health experts participated in a Web-based discussion and clinical advisers participated in two focus
groups as part of audit methods (see Introduction and Background, pages 9 through 12). Clinical advisers are experts
in behavioral health services, employed by the Division or ValueOptions, and assigned to several clinics to provide
guidance to staff during calendar years 2004 and 2005.
2 To identify causes for problems with service delivery, auditors conducted ten case studies on consumers who were
identified in the Arnold v. Sarn court monitor’s 2005 review as having unmet needs according to their ISPs. All
consumer names have been changed. These cases are used for illustrative purposes and are not meant to tell the
whole story.
Consumer needs to
address in service plan
goals1
􀁺􇩓 Safety and other basic
needs (food and shelter)
􀁺􇩁 Access to resources
􀁺􇩓 Symptom relief
􀁺􇩁 Assumption of
responsibilities
􀁺􇩈 Health
􀁺􇩅 Empowerment
􀁺􇩅 Equal opportunity
1 Anthony, William A. A Recovery-
Oriented Service System: Setting
Some System-Level Standards.
Psychiatric Rehabilitation Journal,
Fall, 2000. 159-168, Vol 24, No.2.
Clinical teams may not
always create meaningful
plans appropriate for
consumer needs.
Office of the Auditor General
page 21
that the team should engage the consumer in creating his or her ISP
and use team member expertise to implement it (see text box).
In contrast, experts and clinical advisers identified lack of effective
coordination both within the ValueOptions team and between the
team and other providers. In the May 2005 Boston University review,
experts found that in general, clinical teams in Maricopa County
were not prepared to use resources and supports from the clinical
team to implement the ISP. Clinical advisers also observed this lack
of collaboration among clinical teams. Specifically, advisers in one
focus group noted that members of clinical teams do not
coordinate their efforts or follow up with one another. Further,
advisers in the other focus group said teams lack the ability to use team resources
to match services to consumer needs. An auditor case study shows that the
problem persists:
􀁺􇩔 Tammy, a 37-year-old woman with bipolar disorder, received services valued
at approximately $14,850 in fiscal year 2005. According to her clinical team,
she has not made progress in her substance abuse treatment. She
experienced staff turnover within the team with four new case managers over
an 18-month period, and it appears that the team did not communicate
effectively during times of transition. Each time she had a new case manager,
the team would start over with treatment options. For example, Tammy
attended a substance abuse program for which she expressed dislike, and
later, when a new case manager joined the team, that person referred her to
the program that she did not want to attend. To ensure that Tammy received
consistent guidance to help her progress in her substance abuse treatment,
her clinical team should have communicated and followed up with one
another when someone new joined the team.
In addition to inadequate coordination within the clinical team, ValueOptions’
teams do not always coordinate with others outside the teams. For example,
clinical advisers in one focus group stated that the teams do not consistently
communicate with service providers or follow up with them while consumers are
receiving services. One expert who participated in auditors’ Web-based discussion
also stated that there is a lack of collaborative planning with providers and another
expert commented that there is a lack of interaction between clinical teams and
consumers’ primary care physicians. In addition, auditors found evidence of
clinical teams’ lacking integration of consumers’ legal obligations into their service
planning, such as court-ordered treatment, including a lack of communication with
consumers’ parole officers. Here is an example of a lack of coordination with
providers outside the team, taken from the cases the auditors examined:
􀁺􇩊 Jeff is a 55-year-old man with schizophrenia who received services valued at
approximately $13,330 in fiscal year 2005. His clinical team arranged for a
provider to assist him with medication management to ensure that he takes
his medications as prescribed. While his clinical team coordinated their efforts
internally, the team did not verify that the provider observed Jeff taking his
Clinical teams do not
consistently coordinate
efforts with service
providers.
Typical clinical team members1
􀁺􇩃 Case manager
􀁺􇩃 Clinical liaison (supervisor)
􀁺􇩐 Psychiatrist
􀁺􇩎 Nurse
􀁺􇩒 Rehabilitation specialist
􀁺􇩏 Other professionals as needed
1 A.A.C. R9-21-101(B)14.
medication to ensure that he took the proper dosages. The case manager
later discovered that the consumer was over-medicating himself and that the
provider was not delivering services according to their agreement. To assist
Jeff in effectively managing his medication and reducing the symptoms of his
mental illness, the clinical team should have followed up more effectively with
the service provider to ensure close management of Jeff’s medication.
Division beginning to implement recovery model—To improve service
delivery and to comply with Arnold v. Sarn court requirements (see Appendix A,
page a-iii), the Division and ValueOptions are working with the experts from Boston
University who conducted the May 2005 clinical review. These experts have
proposed a model for using consumer recovery in service planning for Maricopa
County. The model includes specific guidelines for helping consumers set long-term
goals and a planning matrix to help the clinical team identify the types of
services that will be most helpful to the consumer. In addition, the model includes
suggestions for helping clinical teams in Maricopa County improve their
understanding of mental illness and their ability to identify client needs and
establish client objectives based on recovery.
In its November 2005 joint stipulation with the Arnold v. Sarn plaintiffs, the Division
agreed to implement Boston University’s training program based on the principles
of consumer recovery. The purpose of the training is to help clinical teams develop
skills to substantively involve consumers in creating recovery and rehabilitation-oriented
ISPs.
To allow consumer recovery to drive services and to facilitate effective supervision
and clinical team interaction, the Division should continue implementation of the
Boston University training program, maintain the recovery model in service
planning and clinical practices, ensure that the Maricopa County RBHA continues
to train clinical leadership and staff, and monitor RBHA compliance with the
recovery model (see text boxes).
Requirements may impede implementation of recovery
model
While adoption of the recovery model may help address the underlying concerns of
the Arnold v. Sarn lawsuit, some aspects of complying with the settlement of the
lawsuit may have the effect of limiting the Division’s ability to do so. Instead of
measuring outcomes, the Division has focused its measurement on compliance with
process requirements. In addition to monitoring procedural requirements that are
conditions for receiving federal Medicaid funding, the Division must comply with
requirements laid out in court orders associated with the Arnold v. Sarn lawsuit.
State of Arizona
page 22
The Division must comply
with requirements laid out
in court orders
associated with the
Arnold v. Sarn lawsuit.
Recommendation from
experts who participated in
auditors’ Web-based
discussion: Ensure that
clinical teams are properly
trained in the recovery
model.
Recommendation from
clinical advisers: Implement
the Boston University
recovery model and maintain
and monitor it.
Boston University
Training Plan for
Maricopa County
􀁺􇩔 Teaches how to facilitate
consumer recovery.
􀁺􇩃 Certified participants will be
able to use the model and
coach others.
􀁺􇩃 Core group will be certified
in July 2006.
Court requirements drive measurement toward process and
outputs—Court orders associated with the Arnold v. Sarn lawsuit establish
numerous requirements that the Division must meet (see Appendix A, page a-iii).
Agreements between the Division and the plaintiffs prescribe numerous process
requirements for service planning, clinical practices, and oversight, which
contribute to the Division’s lack of focus on consumer
outcomes in these areas. For example, the 1991
Blueprint, a plan for fully implementing the Court’s
judgment, includes specific requirements for clinical
team composition, spells out responsibilities and
processes that the State must follow in the development
and implementation of ISPs, and establishes provisions
for a quality assurance system (see text box). The
Blueprint stipulated that various requirements be
incorporated into the Department’s rules, including
grievance processes, consumer rights, ISP development
and implementation, and standards for residential and
nonresidential services.
To measure compliance with Arnold v. Sarn requirements,
court orders mandate an annual review by a court
monitor. The court monitor follows court requirements by
reviewing a sample of consumers’ cases to measure
compliance with standards, including clinical team
composition, and whether consumers’ ISPs are reviewed
every 6 months and consumers participate in their ISP
development. However, the court-ordered review is not
designed to measure consumers’ progress toward
recovery outcomes over time, but rather focuses on each
consumer’s status on the day of the review. For example,
the review assesses whether the consumers’ needs are
met consistent with their ISPs, based on a review of the
contents of each consumer’s file and interviews with one
or more members of the clinical team, consumer, and/or
a member of the consumer’s family, which are all
completed in one day. The court monitor is to determine whether a consumer’s
needs are met on the day the review takes place in the areas of housing, working
or learning, and social activities. If one of these areas is deemed deficient, the
consumer is considered to have “unmet needs.” The exit stipulation does not
require the court monitor to measure whether a consumer had made incremental
progress in one of those areas, such as whether a consumer went from living in
the Arizona State Hospital, to living in a residential facility, to then living
independently in an apartment.
Experts and clinical advisers attribute the Division’s lack of focus on consumer
outcomes to the rigidity of process measurements in the lawsuit agreements. For
example:
Office of the Auditor General
page 23
Examples of 1991 Blueprint requirements
arising from the Arnold v. Sarn lawsuit
Clinical team
􀁺􇩅 Each consumer shall have an assigned case
manager.
􀁺􇩒 Responsible for locating and obtaining services.
􀁺􇩍 Monitor services and assess continued
appropriateness and effectiveness.
Service planning
􀁺􇩉 ISP to be developed no later than 30 days from the
date of consumer application or referral for
services.
􀁺􇩃 Case manager, in conjunction with clinical team, is
responsible for locating services identified in ISP
and monitoring their delivery.
􀁺􇩉 ISPs shall be reviewed and revised every 6 months.
Quality assurance
􀁺􇩄 Division shall design a comprehensive system of
monitoring, evaluation, and quality assurance for
all areas covered by the Blueprint.
􀁺􇩔 The system shall evaluate appropriateness,
individualization, and effectiveness of services.
􀁺􇩔 The system shall include consumer and family
satisfaction with services.
State of Arizona
page 24
Experts and clinical
advisers attribute the
Division’s lack of focus
on consumer outcomes
to the rigidity of process
measurements in the
lawsuit agreements.
􀁺􇩏 One expert who participated in auditors’ Web-based discussion said the
managed behavioral healthcare system in Maricopa County is caught
between a paternalistic model and recovery-oriented model because of
lawsuit requirements that focus on measuring process instead of outcomes,
and another expert commented that the rigidity of the requirements has
stymied the system in its efforts to improve.
􀁺􇩃 Clinical advisers said the lawsuit drives the Division to take actions and use
oversight mechanisms based on measuring processes instead of outcomes,
causing clinical teams to work to meet administrative requirements rather than
consumer needs. They said that what the Division and ValueOptions report as
a success is not necessarily based on consumer outcomes, but instead
focuses on counting the number of ISPs completed, attributing this to the
desire to meet court-ordered, procedural requirements.
Auditors found indications that, while progress is being made in some areas, it is
not necessarily recognized by existing review mechanisms. For example, experts
who participated in the Web-based discussion commended the Division and
RBHA for increasing community-based housing and launching innovative housing
projects, which have provided consumers with more and better options for safe,
secure living arrangements. In addition, some of the cases auditors reviewed
demonstrated that if the Division could better measure outcomes, such as
independent living or reduction in substance abuse, it might be able to report
consumer progress. For example, two consumers had clearly made progress
toward recovery, even though their needs had not been fully met at the time of a
July 2005 review by a court monitor who oversees compliance with the Arnold v.
Sarn court requirements:
􀁺􇩊 Jeff, the 55-year-old man with schizophrenia whose medications were not
adequately monitored by a service provider, had lived in the state hospital for
15-18 years and then moved to a supervisory care home, according to the
court monitor. In 2005, he moved from the supervisory care home into an
apartment by himself. While he had difficulties taking care of his apartment,
such as cleaning and operating his air conditioner, he attended social
activities and used public transportation. His clinical team was attentive to his
needs by helping him with household management, and considered his long-term
goals in his ISP appropriately. According to the court monitor, Jeff moved
back to a supervisory care home in 2006 because taking care of an apartment
was too difficult for him. Although Jeff had unmet or only partially met needs
in some areas, his accomplishments in 2005 represent significant progress
compared to his prior residence in the state hospital.
􀁺􇩄 Daniel, a 35-year-old man with bipolar disorder and a substance abuse
problem who received services valued at approximately $14,370 in fiscal year
2005, is making progress in his recovery according to his clinical team. His
team focused their efforts on helping him diminish his symptoms and improve
his functioning and worked together to get him direct assistance from the
Office of the Auditor General
page 25
clinic’s substance abuse specialist. The team engaged Daniel in his
treatment, supported him when he made progress and when he relapsed,
and followed up with him when he missed therapy sessions. The clinical team
also supports Daniel’s musical interests, and Daniel played his guitar at the
clinic. Although the court monitor review found that Daniel’s needs for
housing, working or learning, and social activities were only partially met, the
clinical team reported that Daniel made progress in his substance abuse
recovery during the year.
To effectively implement recovery model, Division must
focus on measuring outcomes
Behavioral health experts believe that measuring consumer progress can help
increase accountability of mental health systems and provide a basis for improving
consumer outcomes. Thus, while the Division has made some efforts to measure
outcomes, it should continue to move to greater incorporation of outcome measures
based on consumer progress, such as employment and number of crises, into its
quality management system and RBHA contract (see text box). For example, The
Village, a Southern California behavioral health program, uses a set of measures that
include employment, independent living, symptom distress rated by clients, and level
of functioning rated by staff.1 Other examples of outcome measures include days
in jail and days of involuntary hospital care.
Division has made some efforts to measure outcomes—Although
to date its oversight has focused mainly on process, the Division has begun
focusing on outcomes in its quality management and contractual oversight.
In addition, a now-ended program developed with one-time funding illustrates
the Division’s ability to measure outcomes, and the Division is participating in
two national measurement projects:
􀁺􇩑 Quality management pilot test—In an effort to focus more on outcomes, the
Division is pilot testing a process to measure outcomes for people with SMI in
its quality management plan in the areas of employment, stable-living
situation, social support, reduction of the use of in-patient hospitalization,
decreased criminal justice involvement, and access to services. The Division
is evaluating its data and indicators, and formalized the processed in June
2006.
􀁺􇩏 Oversight of contractual compliance—In January 2006, the Division
developed new outcome measurement standards for its annual Independent
Case Review (ICR) process, which is used to measure compliance with
financial incentive performance indicators included in the ValueOptions’
contract for fiscal years 2006 and 2007. The new standards provide specific
1 The Village Integrated Service Agency.
Outcome measures
Indicators that can be used
to assess a consumer’s
change in status after having
received services.
State of Arizona
page 26
guidance for measuring consumers’ clinical outcomes, such as a decrease in
criminal activity or increased participation in social activities. These standards
will be used to determine whether ValueOptions will be eligible to earn a
portion of its financial incentive for fiscal years 2006 and 2007.
􀁺􇩈 HB2003 program—The Division measured consumer outcomes associated
with a recently concluded program for adults with SMI. The Legislature
required the Division to develop performance measures and assess
outcomes of new programs established using one-time funding from the
State’s tobacco litigation settlement.1 For example, the Division measured the
impact of housing, rehabilitation, and intensive case management programs
on consumers’ level of functioning, use of hospitalization, and substance
abuse. The Division developed a system to collect data to measure consumer
outcomes from the services they received, but according to the Division, now
that the pilot program is over, the Division is no longer collecting some of this
outcome data.
􀁺􇩎 National measurement projects—The Division participates in two national
projects related to the collection of outcome data. According to the
Department, it has incorporated survey questions from the Mental Health
Statistics Improvement Program into its state-wide consumer survey, which
includes the assessment of the outcomes of services.2 In addition, the
Division provides outcome data to the U.S. Department of Health and Human
Services Substance Abuse and Mental Health Services Administration
(SAMHSA), which is working with states to achieve a performance
environment with true accountability.3
While the Division uses mechanisms within its contract and quality management
system to oversee quality of care of behavioral health services, to date, these
measures have been based on process and have not focused on what is
accomplished through system expenditures. For example, the contract with
ValueOptions includes performance measures for fiscal year 2005 that are passed
down from the Division’s contract with AHCCCS that measure such things as access
to care, coordination of care with primary care physician, and consumer/family
involvement in the treatment planning process. In addition, AHCCCS requires the
Division to measure ValueOptions’ performance in “quality clinical outcomes,” but
until fiscal year 2006, performance standards in the Division’s contract with
ValueOptions did not specify what the outcomes should be, such as employment or
reduced number of days in jail.
The Division participates
in two national projects
related to the collection
of outcome data.
1 House Bill 2003, Laws 2000, Fifth Special Session, Chapter 2, §§1 and 5. See Auditor General Report No. 04-03 for
additional information on the HB2003 program.
2 The Mental Health Statistics Improvement Program is a national program that provides uniform, comparable statistical
information about mental health services to enable broad-based research on systems of care and models for service
delivery. It focuses on the need for and development of data standards for high-quality statistical information on mental
health services.
3 The U.S. Department of Health and Human Services Substance Abuse and Mental Health Services Administration
collaborated with states to identify ten domains for national outcome measures for substance abuse and mental health
services, including employment/education, crime and criminal justice, stability in housing, and social connectedness.
Office of the Auditor General
page 27
1 The current Maricopa County contract is effective for 3 years, starting with fiscal year 2005. The contract stipulates
performance incentives of up to 1 percent additional allowed profit for each contract year, with a base profit of 4 percent.
Division should take further action to measure outcomes—To help
increase accountability of the Maricopa County mental health system and provide
a basis for improving consumers’ outcomes, the Division should continue its
current efforts and take some additional steps as follows:
􀁺􇩄 Define outcome goals and develop appropriate outcome measures—
Outcome goals should be measurable and capable of being tracked and
used to improve treatment. Measures should be based on consumer
progress, such as employment and reduced use of crisis services. In February
2006, representatives of the Division, ValueOptions, and the court monitor’s
office visited The Village in Southern California and learned about their
outcome measures. The Division should build on these steps and use the
results of its quality management plan pilot test, as well as the measures used
in the HB2003 program and by SAMHSA, to define outcome goals, and
develop appropriate outcome measures and a system-wide focus on
measuring recovery outcomes.
􀁺􇩃 Continue to incorporate outcomes and financial incentives into its contract
with the RBHA—The quality of services delivered to adults with SMI depends
in large part on the quality of the contracting process. While contracts and
financing mechanisms do not ensure quality, they influence the conduct of
managed care providers. For instance, Massachusetts has helped ensure
quality by tying earnings to performance outcomes in its behavioral health
managed care contract. In addition, SAMHSA reports that financial incentives,
a flat dollar amount or a percentage of profits, can be used to measure the
performance of a managed care provider and they should be large enough to
influence the behavior of the managed care provider. Further, a behavioral
health expert who has consulted with approximately 40 state governments on
their mental health systems recommended allowing ValueOptions to earn a
base profit margin of 1-2 percent for accepting the financial risk of delivering
services, and an additional maximum allowable profit margin should be
established based on compliance with outcome measures. The Division
already implemented a profit incentive in fiscal year 2005 by setting a base
profit of 4 percent and allowing ValueOptions to earn another 1 percent
through complying with certain contract provisions regarding consumer
access to care, which ValueOptions earned. Starting in fiscal year 2006,
ValueOptions can also earn incentives by meeting performance thresholds
related to symptom and functional improvement, satisfaction, coordination of
care, cultural competency, and consumer and family involvement.1 Thus, the
Division should continue and build on these efforts to tie a portion of
ValueOptions’ profits to achieving agreed-upon performance outcomes, such
as consumers having a certain number of days in stable housing (see
recommendations text box, page 28).
The Division should tie a
portion of ValueOptions’
profits to achieving
agreed-upon
performance outcomes.
State of Arizona
page 28
As part of its contractual provisions to collect consumer outcome data, the
Division should ensure that an information management system exists to
properly collect accurate outcome data that can be used to reliably measure
recovery outcomes. The fiscal year 2008 request for proposals should require
the vendor to demonstrate that it has an adequate information technology
system to collect, report, and validate agreed-upon outcome data (see
recommendations text box).
As part of its efforts to focus on outcomes, the Division should consider renegotiating
criteria in the court orders arising from the lawsuit. While the Division, plaintiffs, and
court monitor agreed on steps in January 2006 to improve the reliability and
consistency of the annual review methodologies, these enhancements did not
address the underlying requirements to focus on process rather than consumer
outcomes. The Division should determine which court mandates focus on process
rather than outcomes and inhibit full implementation of an outcome-oriented model,
discuss this with the plaintiffs, and work to modify the provisions (see
recommendations text box). For example, the lawsuit exit stipulation requires a
certain portion of the population to have all of their needs met, as identified on their
ISP, but does not assess whether the goals listed in the ISP will help the consumer
improve his or her functioning and recover, or whether the consumer is making
progress based on the services he or she receives.
The Division should
consider renegotiating
measures of
improvement in the
court orders arising from
the lawsuit.
􀁺􇩉 Implement outcome measures into the RBHA contract.
􀁺􇩄 Develop a more effective quality management system that is based on the measure of
outcomes to identify areas of improvement and move away from the focus on process.
􀁺􇩅 Ensure that the data used to measure outcomes and to make improvements in the system
is validated.
􀁺􇩒 Renegotiate with the plaintiffs the objective measures of improvement in the lawsuit exit
stipulation.
􀁺􇩐 Provide incentives that are aimed toward desired outcomes.
􀁺􇩕 Use data collection as a management tool and to supervise cases, including quality
management.
􀁺􇩒 Renegotiate Appendix C of the exit stipulation to focus on outcomes.
Office of the Auditor General
page 29
Recommendations:
1. The Division should continue its implementation of the Boston University training
program by monitoring the RBHA’s compliance with the recovery model and
ensuring that the Maricopa County RBHA:
a. Continues to train clinical leadership and staff; and
b. Maintains the training principles in service planning and clinical practices.
2. The Division should incorporate measurement of consumer outcomes into its
oversight mechanisms by:
a. Using the results of its quality management plan pilot test, as well as the
measures used in the HB2003 program and by SAMHSA, to define
outcome goals and develop appropriate outcome measures;
b. Continuing to incorporate these measures into the Division’s quality
management plan and RBHA contract;
c. Continuing to tie a portion of the RBHA’s profits to achieving agreed-upon
performances outcomes;
d. Ensuring that an information management system exists to properly collect
accurate outcome data that can be used to reliably measure recovery
outcomes; and
e. Requiring the RBHA to demonstrate that it has an adequate information
technology system to collect, report, and validate agreed-upon outcome
data.
3. The Division should consider renegotiating measures of improvement in the
court orders arising from the Arnold v. Sarn lawsuit by:
a. Determining which court mandates focus on process rather than outcomes
and inhibiting full implementation of an outcome-oriented model; and
b. Discussing this with the plaintiffs and working to modify the provisions.
State of Arizona
page 30
1 The Division’s contracts with RBHAs that serve other areas of the State also allow use of SMI monies for other programs.
Office of the Auditor General
page 31
Division can improve financial oversight and limit
use of SMI monies
Many of the Division’s tools for monitoring the solvency and expenses of
ValueOptions and other RBHAs appear to be working reasonably, but some can be
improved. Financial solvency is important to ensuring that RBHAs can continue to
deliver services without interruption, and the Division has several mechanisms that
appear to be adequately monitoring ValueOptions’ solvency. Similarly, many steps for
controlling expenditures, such as contractual restrictions on profits and
administration, are in place. However, current audit requirements can be
strengthened so that audits become better tools for ensuring compliance with these
requirements. Besides strengthening controls in this way, the Division—and if
necessary, the Legislature—should consider restrictions that would prohibit using
monies appropriated for SMI for other programs. As allowed by contract, over the
past several years, ValueOptions has used more than $21 million in SMI monies for
other programs.1
Monitoring of solvency appears adequate
The Division employs several mechanisms to help ensure and monitor RBHA financial
solvency. Monitoring solvency is important to avoid interruptions in service, as
illustrated by a past RBHA’s financial failure. In 1997, the RBHA for Maricopa County
at the time—ComCare—reached a bankruptcy settlement, necessitating state
takeover of services until a new contractor could be found. The main mechanisms
used by the Division show that ValueOptions is reasonably solvent.
􀁺􇩍 Measuring financial solvency—The Division requires ValueOptions to meet
commonly used financial measures to ensure that it remains solvent,
such as having sufficient assets to meet short-term obligations. As of
June 30, 2005, a division monitoring report showed it was in
compliance with these requirements. AHCCCS uses similar measures
to check the solvency of acute care (medical) and long-term care
providers.
A former RBHA financial
failure illustrates the
importance of financial
oversight.
FINDING 3
Financially solvent—Capable of
meeting financial obligations.
State of Arizona
page 32
􀁺􇩅 Enforcing other standards to ensure solvency—The Division
requires ValueOptions to meet standards intended to ensure
that it remains solvent. In some cases, the Division’s
requirements are higher than AHCCCS’ requirements for acute
care and long-term care providers. For example, the Division
requires ValueOptions to maintain at least $300 equity or
unobligated assets per enrolled member, while AHCCCS
requires no less than $100 or $150 for its acute-care providers,
depending on the provider’s size. As of June 30, 2005, a
division monitoring report showed ValueOptions equity per
enrolled member was $698, and division records show
ValueOptions also complied with all of the solvency standards
such as capitalization requirements and performance bonds
(see text box).
􀁺􇩐 Placing limits on losses—To help protect ValueOptions against
financial failures, the Division limits the amount the company
can lose on the contract. Specifically, the contract between the
Division and ValueOptions limits losses to 4 percent of certain
revenues. For example, if ValueOptions’ losses in its Medicaid
program exceed 4 percent, the Division may reimburse the
losses subject to available funding.
Division oversees spending in multiple ways
Besides checking for solvency, the Division uses a number of methods to oversee
how monies are spent. Monitoring spending is especially important in a capitated
system like Arizona’s, where the RBHA is paid in advance to deliver behavioral health
services instead of receiving payment for services delivered. The Division’s methods
center on two main approaches: analyzing financial reports and conducting various
types of audits. For the most part, these approaches appear to be working
reasonably.
Analyzing financial reports—The Division analyzes ValueOptions’ monthly,
quarterly, and annual financial statements to determine the RBHAs’ compliance
with financial requirements and spending limitations that help monitor spending.
The Division monitors spending through the following:
􀁺􇩍 Minimum spending levels for services—The Division establishes minimum
expenditure levels for services to help ensure that an adequate level of
services are provided. Specifically, the Division requires ValueOptions to
spend at least 88.5 percent of each type of contract revenue—Medicaid,
KidsCare, and others—on services. These limits are higher than those
Measures of financial solvency
􀁺􇩃 Current ratio measures ability to pay for short-term
obligations (current assets divided by
current liabilities). Division requires current
ratio of at least 1.
􀁺􇩄 Defensive interval measures the number of
days a provider can operate on assets that can
be quickly converted into cash. Division
requires defensive interval of at least 30 days.
Standards to ensure solvency
􀁺􇩅 Equity per enrollee—Division requires net
worth of at least $300 per enrolled member.
􀁺􇩃 Capitalization requirements—Division requires
the RBHA to maintain net assets greater than
or equal to 90 percent of monthly revenues but
no less than $10 million, whichever is greater.
􀁺􇩐 Performance bond—Division requires a bond
to guarantee payments to providers. As of July
2006, ValueOptions’ bond totaled nearly $50
million.
Office of the Auditor General
page 33
imposed by AHCCCS, which requires its acute care providers to spend at
least 80 percent of contract revenues on services and its long-term care
contractors to spend at least 85 percent of contract revenue on services. A
division monitoring report shows that ValueOptions met this requirement
during fiscal year 2005.
􀁺􇩌 Limits on administrative expenses—The Division limits ValueOptions’
administrative expenses. For example, ValueOptions can spend up to 7.5
percent of its Medicaid revenues on administrative expenses related to its
Medicaid programs, and up to 7.5 percent of its KidsCare revenues for
KidsCare-related administrative expenses. Again, these limits are more
stringent than those that AHCCCS imposes, which limits administrative costs
for acute care providers to no more than 10 percent of the contract revenue
and administrative costs for long-term providers to no more than 8 percent.
Placing limits on administrative expenses is also in line with practices that the
auditors found in reviewing relevant literature.1 A division monitoring report
shows that ValueOptions substantially met this requirement during fiscal year
2005.2
􀁺􇩌 Limits on service profits—The Division limits ValueOptions’ profits on service
revenues.3 Specifically, for fiscal year 2005, there is a 4 percent limit on service
profits for Medicaid, KidsCare, and other contract monies, respectively. In
addition, its children’s program service profits are also limited to 4 percent of
service revenues in each category.4 If ValueOptions has service profits of more
than 4 percent in one of these categories, it must return the excess monies to
the Division within 12 months of fiscal year-end. The Bazelon Center for Mental
Health Law and the federal SAMHSA recommend that public payers,
including states and local authorities, consider limiting profits.5 Further,
SAMHSA reports that public payers such as states consider less than 5
percent to be a reasonable profit margin.6 As illustrated in Table 3 (see page
34), a division monitoring report shows that ValueOptions’ service profits were
ValueOptions met
spending standards in
fiscal year 2005.
1 Koyanagi, Chris. Managing Managed Care for Publicly Financed Mental Health Services. Washington, D.C.: Judge David
L. Baselon Center for Mental Health Law, 1995; U.S. Department of Health and Human Services. Office of the Inspector
General. Cost-Saver Handbook. Washington, D.C.: DHHS, 2004.
2 ValueOption’s KidsCare administrative expenses were 0.05 percent over the limit in fiscal year 2005. A division official
explained that administrative expenses in excess of limits decreased ValueOptions’ overall profits.
3 Service revenue equals 92.5 percent of total Department of Health Services revenue adjusted for certain payables and
receivables.
4 Combined administrative expenses and profits for House Bill 2003 programs are limited to 8 percent of these program
revenues. The Legislature appropriated one-time funding for these programs in fiscal year 2001, and this program ended
on July 1, 2005.
5 Koyanagi, Chris. Managing Managed Care for Publicly Financed Mental Health Services. Washington, D.C.: Judge David
L. Bazelon Center for Mental Health Law, 1995; Moss, Stephen. Contracting for Managed Substance Abuse and Mental
Health Services: A Guide for Public Purchasers. Technical Assistance Publication Series #22. DHHS Publication No.
(SMA) 98-3173. Rockville, MD: U.S. Department of Health and Human Services, Public Health Service, Substance Abuse
and Mental Health Services Administration, Center for Substance Abuse Treatment, Oct. 1998.
6 Savela, Terry, Gail Robinson, Sarah Crow. Contracting for Public Mental Health Services: Opinions of Managed Care
Behavioral Health Care Organizations. DHHS Publication No. (SMA) 00-3438. Rockville, MD: U.S. Department of Health
and Human Services, Substance Abuse and Mental Health Services Administration, Center for Mental Health Services,
2000.
State of Arizona
page 34
well within its contractual limits during fiscal year 2005, although it was
required to return approximately $1.5 million because it exceeded contract
limits in the “other monies” children’s funding category.
Requiring audits—In addition to analyzing financial reports, the Division
requires ValueOptions to obtain several audits. Most of these audits are
conducted to ensure that financial reports accurately reflect ValueOptions’
activities. Specifically, the Division requires:
􀁼􇱁 An annual audit of ValueOptions’ financial statements—This audit,
conducted by an independent auditor, provides reasonable assurance
that the financial statements are free of material misstatements and
reliable. In fiscal year 2005, this audit found that ValueOptions’ financial
statements reasonably represented its financial position.
􀁼􇱁 An opinion on ValueOptions’ statements of activities—Similar to the
financial statement audit, this opinion provides reasonable assurance
of the accuracy of these statements. The statements of activities
present a more detailed description of revenues and expenses than
what is found in typical financial statements. Specifically, revenues and
expenses are reported by different types of programs, including
Medicaid children, Medicaid adult with SMI, and general mental health
programs. In addition, expenses are segregated into 13 different
Medicaid KidsCare
Other
Monies
Service revenues¹ $332,366,387 $6,745,651 $112,944,051
Service and income taxes expenses 326,617,921 6,536,714 110,001,617
Service profits $ 5,748,466 $ 208,937 $ 2,942,434
Allowable service profits² $ 13,294,655 $ 269,826 $ 4,517,762
Contractual service profit limit 4.0% 4.0% 4.0%
Achieved service profit3,4 1.7% 3.1% 2.6%
¹ Service revenues in this table represent total contract revenues, excluding HB2003 and
PASARR (pre-Admission Screening and Resident Review), less 7.5 percent allowed for
administrative expenses, or 92.5 percent of each program fund’s total contract revenues
excluding HB2003 and PASARR.
² Allowable service profits equal 4 percent of total service revenues.
³ Service profit achieved equal service profits divided by service revenues.
4 The Division’s profits/risk corridor analysis, based on ValueOptions’ audited financial
statements, reflects accounting adjustments for timing and other factors. ValueOptions’
analysis based on its audited financial statements shows service profits for Medicaid,
KidsCare, and Other Monies of 1.8 percent, 3.1 percent, and 1.9 percent, respectively.
Source: Auditor General staff analysis of the Division’s profits/risk corridor analysis for
ValueOptions for fiscal year 2005.
Table 3: ValueOptions’ Compliance with Service Profits Limits
By Program Fund Category
Fiscal Year 2005
(Unaudited)
Office of the Auditor General
page 35
service categories such as treatment, crisis intervention, and residential
services. In fiscal year 2005, this audit found that these statements
reasonably represented ValueOptions’ activities.
􀁼􇱁 An audit to determine compliance with U.S. Office of Management and
Budget Circular A-133 (OMB A-133)—This audit determines compliance
with federal requirements for ValueOptions programs funded
with federal grants. Typically, an OMB A-133 audit is
mandated by the federal government when a state or local
government or a not-for-profit entity spends more than
$500,000 of federal grant monies. However, beginning in its
fiscal year 2005 contract, the Division required ValueOptions,
a for-profit entity, to have an OMB A-133 audit of its federal
grants. As part of this review, independent auditors examined
internal controls over financial reporting and compliance with
laws, regulations, and contract provisions that have a
material effect on federal programs (see text box).
Audit results demonstrate need for additional oversight
Although recent efforts to increase monitoring through added audit requirements
resulted in the recovery of $1.5 million, most monies and contractual provisions are
not subject to all the current requirements. In the OMB A-133 audit, independent
auditors found that ValueOptions had not evaluated by fund source its estimate for
claims not yet reported by its providers. After discovering the error when reviewing
federal programs, the independent auditors recommended corrections to claims
estimates for all programs. They found that because ValueOptions did not evaluate
claims by fund source there was an error in the claims estimate for non-Medicaid
children’s services. This error resulted in overstating expenses and understating
ValueOptions’ service profit. When the error was corrected, the independent auditors
determined that ValueOptions had more service profits in the “other monies”
children’s funding category than it was allowed to earn under its contract with the
Division. ValueOptions returned approximately $1.5 million in excess service profits
to the Division in February 2006.
While valuable, the OMB A-133 audit examined only 4.8 percent of the money the
Division provided to ValueOptions in fiscal year 2005. In fiscal year 2005, the Division
provided over $489 million to ValueOptions, including federal grant programs totaling
$23.5 million. OMB A-133 auditors were only required to examine the federal grant
programs, which do not include the largest funding source, Medicaid. A compliance
audit covering the nearly $466 million of nonfederal program monies it received from
the Division could have resulted in the discovery of other types of problems.
Examples of OMB A-133
compliance requirements
􀁺􇩁 Allowable and unallowable
activities
􀁺􇩁 Allowable and unallowable costs
􀁺􇩃 Cash management
􀁺􇩐 Procurement
􀁺􇩒 Reporting requirements
􀁺􇩓 Sub-recipient monitoring
State of Arizona
page 36
Further, although audits of financial statements provide reasonable assurance
regarding ValueOptions’ financial reporting and use of program monies, they do
not sufficiently enable the Division to ensure that monies are spent appropriately.
Financial statement audits show that ValueOptions recorded its revenues,
expenses, assets, and liabilities accurately. However, these audits are not
designed to test compliance with all division requirements. For example, these
audits may or may not include checking compliance with division contract limits on
administrative expenses or minimum requirements for service expenditures.
The Division should continue to strengthen its audit requirements over contractual
requirements and nonfederal monies. To better ensure monies are spent
appropriately, the Division should consider adding an audit requirement for all non-federal
program monies that tests for compliance with requirements important to
the Division. These audit requirements for nonfederal monies can include the
following:
􀁺􇩒 Requiring a compliance audit following AICPA’s Professional Standards for
Attestation Engagements. These standards establish guidelines for
conducting an attestation review and determining compliance with a defined
requirement. An attestation engagement is similar to an audit; however, it is
more flexible in that it would allow the Division to define what topics,
requirements, or standards should be covered by the review. By requiring this
type of review, the Division would ensure that ValueOptions’ independent
auditors determine compliance with requirements important to the Division.
􀁺􇩄 Determining which compliance requirements and standards should be met
and how frequently specific requirements should be tested. For example, the
Division could require the reviewer to examine a limited number of
requirements each year on a rotating basis in order to cover all important
standards over a period of several years, while limiting the costs of the
reviews. The Division can consider rotating requirements based on prior
years’ audit results and risk of noncompliance.
After obtaining audit reports, the Division should review the results of the required
audits and take action when appropriate.
Additional spending restrictions should be considered
Although the Division limits profits to a percentage of each type of service
revenue—Medicaid, KidsCare, and other—it allows ValueOptions to use monies
allocated for adults with SMI for other programs, including programs for children,
adult general mental health, and substance abuse. If the Legislature wants to
ensure that its appropriations are used to provide services to adults with SMI, it
Compliance Audits Can
Follow AICPA Standards
The American Institute of
Certified Public Accountants
issues professional standards
for compliance audits and
attestation engagements.
The audit for compliance
with federal requirements
was limited to a small
portion of contract
revenues.
Office of the Auditor General
page 37
may wish to consider limits on the use of these
monies similar to the limits established on
appropriations for children’s behavioral health
programs.
SMI monies have been used to deliver
services for other consumers—The
Division allows ValueOptions to use revenues
allocated for adults with SMI to be used to
support or make up for losses in other
programs. The Legislature has increased
appropriations for services to adults with SMI in
the past several years, although appropriations
dropped from fiscal year 2004 to fiscal year
2005 (see Figure 6). Specifically, the
Legislature increased its appropriations by
approximately 119 percent between fiscal
years 2002 and 2007. These monies include
appropriations intended to address requirements
of the Arnold v. Sarn lawsuit.
Because neither statute nor the Division’s contract with ValueOptions restricts the use
of monies allocated or appropriated to serve adults with SMI, the monies can be
used to fund services for other populations. By contract, starting in fiscal year 2005,
the Division allows ValueOptions to earn up to 4 percent profit on service revenue
within each major program—Medicaid, Kidscare, and other contract monies. Within
each of these major programs, though, ValueOptions can use SMI monies for other
categories within the same program. For example, it can use SMI Medicaid funds for
other Medicaid funding categories, such as children’s programs or adult substance
abuse programs. Auditors reviewed the Division’s analyses of ValueOptions’ profits
and losses for fiscal years 2002 to 2005 and found that some revenues the Division
allocated to ValueOptions to pay for services for adults with SMI were used to make
up losses in other programs, as allowed by contract. Specifically, in fiscal year 2002,
ValueOptions used $7.5 million of Medicaid and KidsCare SMI monies to make up
losses in other Medicaid and KidsCare programs, including programs for children,
adult general mental health, and substance abuse. Similarly, ValueOptions used $6.9
million of Medicaid and KidsCare SMI monies in fiscal year 2003 and $7 million in
fiscal year 2004 for these programs. In fiscal year 2005, ValueOptions did not use SMI
monies to offset losses in other programs.
In addition to using adult SMI monies to offset other programs’ losses, ValueOptions
has used these monies disproportionately to earn its allowed profits. As illustrated in
Figure 7 (see page 38), ValueOptions used net income it earned from its SMI
Medicaid program to offset other Medicaid program losses, as allowed by contract.
The most significant offset occurred in fiscal year 2004, when it used $15.8 million
Neither statutes nor
contract provisions
restrict the use of
monies appropriated for
adults with SMI.
$0
$100
$200
$300
$400
$500
2002 2003 2004 2005 2006 2007
Fiscal Year
Millions
Source: Auditor General staff analysis of appropriations reports for fiscal years 2002
through 2007 prepared by the Joint Legislative Budget Committee.
Figure 6: Legislative Appropriations for
Behavioral Health Services for Adults with SMI
Fiscal Years 2002 through 2007
State of Arizona
page 38
from SMI Medicaid monies to offset $9.7 million in losses in other Medicaid
programs. ValueOptions had losses totaling $6 million in its children’s Medicaid
programs and $3.7 million in non-SMI adult Medicaid programs that year. Still, it
earned approximately $6.1 million in total profit from all Medicaid programs, which
includes $6.0 million in service revenue, representing 2.17 percent of Medicaid
service revenue. This was below the fiscal year 2004 contractually allowed profit
of 5 percent. However, the profit came entirely from Medicaid SMI monies
because all other programs incurred losses. In fiscal year 2005, ValueOptions did
not use SMI Medicaid monies to offset losses in other Medicaid programs, as it
had in previous years.
Given that the Legislature has increased funding to provide more services and
meet requirements associated with the Arnold v. Sarn lawsuit (see Appendix A),
the Division should consider limiting the use of monies allocated for adults with
2.8
-6.0
2.2 3.0
15.8
3.2
13.2
14.2
1.2
-6.2 -6.1 -2.3 -1.6 -0.3 -1.4
-$10
-$5
$0
$5
$10
$15
$20
2002 2003 2004 2005
Fiscal Year
Millions
Children
Adults with SMI
Adults with General Mental Health and Substance Abuse Issues
Adults with Developmental Disabilities2
Figure 7: ValueOptions’ Medicaid Programs Losses and Profits1
In Millions of Dollars
Fiscal Years 2002 through 2005
(Unaudited)
1 Figure does not include other funding sources, specifically KidsCare and other contract monies.
2 ValueOptions receives Medicaid monies to provide behavioral health services to adults with
developmental disabilities, including adults with SMI. These monies were included in the children and
adults with SMI programs in fiscal year 2002.
Source: Auditor General staff analysis of the Division’s profits/risk corridor analysis for ValueOptions for fiscal years 2002
through 2005.
Office of the Auditor General
page 39
SMI. Specifically, the Division should consider a contract provision that would limit
using monies allocated to fund programs for adults with SMI to make up for losses
in other programs. A contractual requirement limiting the use of SMI monies would
restrict ValueOptions’ ability to manage behavioral health services because it would
not be able to transfer money between programs. However, the Division would still
maintain the ability to transfer monies among programs to meet unexpected needs
or demands.
If the Legislature wants to ensure its adult SMI appropriations are used to provide
services only to adults with SMI, it may wish to consider statutorily limiting the use of
these monies similar to the limits it has placed on appropriations for children’s
programs. In 2000, the Legislature enacted A.R.S. §36-3410, which limits the use of
appropriated monies for children’s behavioral services to be used as intended by
their appropriation. Thus, the Division’s contract with ValueOptions establishes that
any excess profits in children’s programs may not be used to offset losses in
programs for adults, including adults with SMI. Instead, these excess monies must
be returned to the Division within 12 months after the end of the fiscal year. As the
Legislature considers whether to similarly restrict adult SMI monies, it should
consider the impact this tighter control may have on other programs. Specifically,
imposing this statutory limit would reduce ValueOptions’ and the Division’s flexibility
to manage behavioral health services and use available monies to meet unexpected
needs.
Recommendations:
1. To better ensure monies are spent appropriately, the Division should consider
expanding the current compliance audit requirement to include all program
monies. If the Division determines a compliance audit is needed, it should:
a. Determine which requirements and standards are most important to it and
should be included as part of a contractually required audit;
b. Develop contract provisions that would require auditing nonfederal
program monies against those requirements; and
c. Review the results of these audit reports and take action when appropriate.
2. The Division should consider a contract provision that would limit the Maricopa
County RBHA’s ability to use SMI monies for other programs. As the Division
considers this option, it should consider the impact this contract limit would have
on the RBHA’s ability to manage other programs.
3. The Legislature may wish to consider statutorily limiting monies appropriated for
adults with SMI to be used only for this population. As the Legislature considers
this option, it should consider the impact on other behavioral health programs.
State of Arizona
page 40
Office of the Auditor General
page 41
Better oversight needed of service level provided
The Division should take steps to strengthen its contractual requirements in order to
better ensure that ValueOptions del

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Special Audit
Department of Health
Services–
Behavioral Health Services for Adults
With Serious Mental Illness in
Maricopa County
Performance Audit Division
Debra K. Davenport
Auditor General
SEPTEMBER • 2006
REPORT NO. 06 – 09
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Representative Laura Knaperek, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Ed Ableser
Representative Ted Downing Senator Carolyn Allen
Representative Pete Rios Senator John Huppenthal
Representative Steve Yarbrough Senator Richard Miranda
Representative Jim Weiers (ex-officio) Senator Ken Bennett (ex-officio)
Audit Staff
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Monique Cordova, Team Leader
Tara Nielson
Elizabeth Shoemaker
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
September 28, 2006
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Ms. Susan Gerard, Director
Department of Health Services
Transmitted herewith is a report of the Auditor General, A Special Audit of the Department
of Health Services—Behavioral Health Services for Adults with Serious Mental Illness in
Maricopa County. This report is in response to Laws 2005, Chapter 256, Section 1 and was
conducted under the authority vested in the Auditor General by Arizona Revised Statutes §41-
1279.03. I am also transmitting with this report a copy of the Report Highlights for this audit
to provide a quick summary for your convenience.
As outlined in its response, the Department of Health Services agrees with all of the
findings and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on September 29, 2006.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
The Office of the Auditor General has conducted a special audit of the delivery of
behavioral health services to adults with serious mental illness (SMI) in Maricopa
County, pursuant to Laws 2005, Chapter 256, Section 1. The audit was conducted
under the authority vested in the Auditor General by Arizona Revised Statutes (A.R.S.)
§41-1279.03.
Serious mental illness (SMI) is not a specific mental disorder, but a designation for a
group of mental health conditions. To obtain SMI designation in Arizona, a person
must be at least 18 years old and have a qualifying psychiatric diagnosis and a
resulting functional impairment.1 As of fiscal year 2005, more than 18,000 adults with
SMI were enrolled to receive services in Maricopa County, according to the Arizona
Department of Health Services, Division of Behavioral Health Services (Division). The
number of adults with SMI in Maricopa County has risen by approximately 50 percent
since 2000. Arizona, once near the bottom in state mental health spending, is now
tenth among the states.
The Division’s funding to administer the system includes Medicaid and KidsCare
monies—a blend of federal funding and state matching monies—from the Arizona
Health Care Cost Containment System (AHCCCS), additional monies from the
State’s General Fund, and other government funding, including federal grants, county
funds, and other legislative appropriations. The growth in Arizona’s mental health
funding is due, in part, to population growth and the expansion of Arizona’s Medicaid
program that occurred following voter approval of Proposition 204 in 2000, which
expanded Medicaid eligibility up to 100 percent of the federal poverty guidelines.
The State of Arizona contracts with managed-care organizations called “Regional
Behavioral Health Authorities,” or RBHAs, to administer behavioral health services in
specific geographic service areas of the State. The Division contracts with a private
company, VO of Arizona, Inc. (ValueOptions), to administer Maricopa County’s
behavioral health system. 2, 3
1 Psychiatric diagnoses are standardized and published in The Diagnostic and Statistical Manual of Mental Disorders,
Fourth Edition (DSM-IV), published by the American Psychiatric Association. It is the official reference guide that
psychiatrists and other clinicians use to identify psychiatric diagnoses.
2 This audit focused on that portion of the system that provides services to adults with SMI. Other parts of the system
administered by ValueOptions cover children’s mental health services, general mental health, and substance abuse.
3 The State contracts with VO of Arizona, Inc., an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned subsidiary of
Virginia-based FHC Health Systems. In addition to VO of Arizona, Inc., ValueOptions, Inc. has affiliates that manage
behavioral health systems in several states, including Colorado, Florida, Massachusetts, New Jersey, New Mexico, North
Carolina, and Texas.
Office of the Auditor General
SUMMARY
page i
1 The Division and the RBHAs refer to people receiving services as consumers.
This audit focused on the following main topics:
􀁺􇩈 How the money for adult SMI services is being spent in Maricopa County.
􀁺􇩗 Whether there is an adequate focus on the outcomes achieved by the services.
􀁺􇩔 The use of SMI monies and how effectively the Division conducts financial
oversight.
􀁺􇩈 How effectively the Division reviews the levels and costs of services reported by
ValueOptions and its subcontractors.
SMI monies fund a diverse range of services in Maricopa
County (see pages 13 through 17)
In fiscal year 2005, program expenses for adults with SMI in Maricopa County totaled
approximately $243 million. These monies were spent primarily on a diverse range of
services shown in Table 1 (see page iii). Specifically, support, including case
management services such as helping consumers obtain services and monitoring
service delivery, accounted for about 42 percent of the amount spent on services.1
The rest went to such services as medication, inpatient and residential care,
rehabilitation, and crisis intervention. ValueOptions provided most of the case
management and other support services, while subcontractors provided nearly all of
the other services.
Division should strengthen focus on outcomes (see
pages 19 through 29)
Research shows that adults with SMI can recover and that outcome goals should
determine the services provided. To date, however, the focus on what expenditures
are accomplishing has been limited as the Division continues to implement basic
system requirements brought on by a 1981 lawsuit, Arnold v. Sarn. The Arnold v. Sarn
lawsuit was filed on behalf of people with SMI in Maricopa County and alleged that
the State and Maricopa County failed to provide them adequate community health
services as required by law.
The Division is attempting to move its behavioral health program in a results-oriented
direction, in part by adopting a recovery-based model aimed at helping people make
progress toward recovery from SMI. However, the Division may experience difficulty
State of Arizona
page ii
in moving further in this direction, in large part because it must continue to comply
with the Arnold v. Sarn lawsuit and other federal and state process requirements.
Compliance with lawsuit requirements is measured through a court-ordered review
that is not designed to measure consumers’ progress toward recovery over time, but
rather focuses on the consumer’s status on the day of the review. Experts and clinical
advisers who provided input to auditors noted that the emphasis in Maricopa County
is focused on the process of service delivery rather than the level of progress
Office of the Auditor General
page iii
Table 1: ValueOptions’ SMI Expenses
By Type of Service Delivered
Fiscal Year 2005
(Unaudited)
Expenses
(in millions) Service Category Description
$101.0 Support To plan clinical treatment, help consumers obtain services and
resources (such as housing or food preparation), and monitor
service delivery.
41.1 Medication To provide prescription drugs intended to prevent, stabilize, or
improve symptoms.
26.5 Inpatient services To provide inpatient detoxification and psychiatric services delivered
in hospitals and other inpatient facilities.
17.8 Residential services To provide 24-hour residential services, including structured
treatment and room and board.
13.9 Rehabilitation
services
To provide education, coaching, training, and other services,
including securing and maintaining employment.
13.7 Treatment services To provide counseling, therapy, assessment, evaluation, screening,
and other services to reduce symptoms and promote functioning.
12.7 Medical services To provide services to reduce symptoms and improve or maintain
functioning, including laboratory, radiology, and medical imaging.
Also includes medication management.
9.9 Crisis intervention
services
To provide telephone crisis lines, mobile crisis intervention units, and
crisis services delivered at two psychiatric rehabilitation centers.
6.1 Day programs To provide skills training and development, behavioral health
prevention/promotion, medication training and support, support to
maintain employment, and self-help/peer services to improve
consumers’ ability to function in the community.
0.5 Other To provide other services, including some housing, vocational,
screening, and evaluation services.
$243.2 Total
Source: Auditor General staff analysis of financial information provided by ValueOptions for fiscal year 2005 from its
financial accounting system and ValueOptions’ audited financial statements for fiscal year 2005.
consumers achieve, and they attributed the Division’s lack of focus on consumer
outcomes to the rigidity of process measurements in the lawsuit agreements.
To make further progress in moving to a results-oriented approach, the Division
should take action on two main fronts:
􀁺􇩉 Incorporating outcome measures into oversight mechanisms. The Division
should continue to develop outcome measures, such as employment and
number of crises, into its oversight of the behavioral health system and its
contract with the RBHA. The Division should continue to allow the RBHA to earn
a portion of its profits through the achievement of specified performance
outcomes.
􀁺􇩒 Reducing process-oriented measures that do not contribute to results. The
Division should consider renegotiating measures of improvement in the court
orders arising from the lawsuit. Specifically, the Division should determine which
court mandates focus on process rather than outcomes and inhibit full
implementation of an outcome-oriented model, discuss this with the plaintiffs,
and work to modify the provisions.
Division can improve financial oversight and limit use of
SMI monies (see pages 31 through 39)
Many of the Division’s tools for monitoring the solvency and expenses of
ValueOptions and other RBHAs appear to be working reasonably, but some can be
improved. Financial solvency is key to ensuring that RBHAs can continue to deliver
services without interruption, and the Division has several mechanisms that appear
to be adequately monitoring ValueOptions’ solvency. Similarly, many steps for
controlling expenses, such as contractual restrictions on service profits and
administration, are in place. However, auditors identified two areas in which
processes can be strengthened:
􀁺􇩔 Tailoring financial audits to ensure that monies are spent appropriately. The
financial audits that ValueOptions is required to undergo provide some
assurance regarding ValueOptions’ financial reporting and use of program
monies, but do not sufficiently enable the Division to ensure that monies are
spent appropriately. The Division could improve spending oversight by requiring
a compliance audit that would determine if ValueOptions used monies in
accordance with contractual requirements. For example, it should consider
requiring a compliance audit in line with the American Institute of Certified Public
Accountants’ professional standards for determining compliance with defined
requirements.
State of Arizona
page iv
􀁺􇩌 Limiting the use of SMI monies for other programs. The Division allows
ValueOptions to use monies allocated for adults with SMI for other programs. By
contract, starting in fiscal year 2005, the Division allows ValueOptions to earn up
to 4 percent profit on service revenue within each major program—Medicaid,
KidsCare, and other contract monies.1 Within each of these major programs,
though, ValueOptions can use SMI monies for other categories within the same
program. For example, it can use SMI Medicaid funds for other Medicaid
funding categories, as allowed by contract, such as children’s programs or adult
substance abuse programs.2 Specifically, in fiscal years 2002 through 2004,
ValueOptions used a total of $21.4 million of Medicaid and KidsCare SMI
revenues for other Medicaid and KidsCare programs.3 However, the Legislature
appropriated these monies for use in SMI programs, with annual increases from
fiscal years 2002 through 2004 intended to address requirements of the Arnold
v. Sarn lawsuit.
In addition to using SMI monies to offset other program losses, ValueOptions
has used these monies disproportionately to earn its allowed profits. For
example, as allowed by contract, during fiscal years 2002 through 2004,
ValueOptions used net income it earned from SMI Medicaid monies to offset
losses in other Medicaid programs. The most significant offset occurred in fiscal
year 2004, when it used $15.8 million from SMI Medicaid monies to offset $9.7
million in other Medicaid programs’ losses. ValueOptions had losses totaling $6
million in its children’s Medicaid programs and $3.7 million in non-SMI adult
Medicaid programs that year. Still, it earned approximately $6.1 million in total
Medicaid profits entirely from Medicaid SMI monies, including service profits of
$6 million, which represented 2.17 percent of Medicaid service revenue. This
was below the fiscal year 2004 contractually allowed profit of 5 percent. In fiscal
year 2005, ValueOptions did not use SMI Medicaid monies to offset losses in
other Medicaid programs, and it again complied with contractual limits on
service profits.
Given that the Legislature has increased funding to provide more SMI services
and meet lawsuit requirements, the Division should consider including a
provision in its RBHA contract that would limit the use of excess SMI revenues
to make up for losses in other programs. If the Legislature wants to ensure that
its SMI appropriations are used to provide services only to adults with SMI, it
may wish to consider statutorily limiting the use of these monies similar to the
statutory limits it has placed on appropriations for children’s behavioral health
programs.
Office of the Auditor General
page v
1 Service revenues represent total contract revenues less 7.5 percent allowed for administrative expenses, or 92.5 percent
of each program fund’s total contract revenues. Starting in fiscal year 2005, allowable service profits equal 4 percent of
total service revenues. Before fiscal year 2005, the profit limit was 5 percent of these revenues.
2 This report uses the term “program” throughout the report when referring to the three major funding categories into which
behavioral health services monies are categorized—Medicaid, KidsCare, and Other Contract Monies. The use of the term
“program” represents the same thing as the term “funding category.”
3 Auditors’ analysis of division profit/risk corridor analysis reports for fiscal years 2002, 2003, and 2004 showed SMI
Medicaid and KidsCare profits of $7.5 million, $6.9 million, and $7 million, respectively, were used for other Medicaid and
KidsCare programs. Division reports are based on ValueOptions’ audited financial statements and reflect accounting
adjustments for timing and other factors.
Better oversight needed of service level provided (see
pages 41 through 46)
The Division should take steps to strengthen its contractual requirements in order to
better ensure that ValueOptions delivers sufficient services to adults with SMI. Under
the State’s RBHA contract, ValueOptions is required to submit electronic records
showing that it delivered services that equal at least 85 percent of the service
revenues ValueOptions received under its contract.1 ValueOptions establishes
service values in its contracts with its subcontractors and reports these values for the
services the subcontractors deliver. However, the Division’s contract with
ValueOptions allows ValueOptions to assign its own value for each of the services it
delivers. Because the Division does not approve the reasonableness of these service
values, the contractual requirement does not achieve its intended purpose. As of July
1, 2006, the Division has drafted revisions to its Financial Reporting Guide that would
make its monitoring more meaningful. For example, the revisions state that the
Division will use an AHCCCS-approved fee schedule to value encounters in order to
determine if the 85 percent requirement has been met. Division management reports
it is considering further revisions, such as adding a fixed percentage to the fee
schedule for purposes of valuing encounters.
Auditors compared the values that ValueOptions reported to the Division for services
it delivered itself with values ValueOptions reported it paid to its subcontractors for
the same types of services, and also with the amounts allowed in an AHCCCS-approved
fee schedule the State uses when it pays providers directly on a fee-for-service
basis. ValueOptions often assigned much higher values to its services.
Auditors’ analysis of the Division’s fiscal year 2005 encounter data concluded that
ValueOptions valued its services at approximately 99 percent higher than what it
would have if it had been using the State’s fee-for-service schedule.2 ValueOptions
officials have explained that its costs are high due to contractual and Arnold v. Sarn
lawsuit requirements, and therefore the values for the services it provided are higher
than the values it has established for the same services provided by its
subcontractors and the fee-for-service schedule. However, because the Division’s
contract with ValueOptions does not require ValueOptions to support its service
values with a fiscally sound analysis, the Division cannot determine whether the
service values are reasonable in light of ValueOptions’ costs. To make the service
level requirement effective, the Division should continue its efforts to establish a
process for assigning appropriate values to services.
1 This same requirement is included in the Division’s contracts with the RBHAs that serve other areas of the State.
2 Auditors’ analysis included encounters for services delivered during fiscal year 2005 that were submitted to the Division
as of November 2005. In addition, auditors only analyzed encounters approved by the Division, with fees that were
updated and approved by AHCCCS for fiscal year 2006.
State of Arizona
page vi
Other Pertinent Information (see pages 47 through 48)
As part of the audit, auditors gathered other pertinent information regarding the
administrative expenses associated with ValueOptions’ Arizona operations.
ValueOptions’ overall administrative expenses totaled approximately $37.2 million in
fiscal year 2005, and substantially complied with the Division’s requirement limiting
administrative expenses to 7.5 percent of each type of contract revenue.
Office of the Auditor General
page vii
State of Arizona
page viii
Office of the Auditor General
continued
page ix
TABLE OF CONTENTS
1
13
13
15
19
19
22
25
29
31
31
32
35
36
39
41
41
42
46
Introduction & Background
Finding 1: SMI monies fund a diverse range of services in
Maricopa County
ValueOptions received about half of State’s behavioral health funding
Largest category of adult SMI services is support, including case
management
Finding 2: Division should strengthen focus on outcomes
Limited focus to date on what system expenditures accomplish
Requirements may impede implementation of recovery model
To effectively implement recovery model, Division must focus on
measuring outcomes
Recommendations
Finding 3: Division can improve financial oversight and
limit use of SMI monies
Monitoring of solvency appears adequate
Division oversees spending in multiple ways
Audit results demonstrate need for additional oversight
Additional spending restrictions should be considered
Recommendations
Finding 4: Better oversight needed of service level
provided
Data used to monitor services and determine funding needs
Monitoring system does not achieve its intended purpose
Recommendations
State of Arizona
TABLE OF CONTENTS
page x
47
a-i
iii
5
34
44
47
3
7
continued
Other Pertinent Information
Appendix A
Agency Response
Tables:
1 ValueOptions’ SMI Expenses
By Type of Service Delivered
Fiscal Year 2005
(Unaudited)
2 ValueOptions’ Schedule of SMI Service Revenues and Expenses
Fiscal Years 2004 through 2006
3 ValueOptions’ Compliance with Service Profits Limit
By Program Fund Category
Fiscal Year 2005
(Unaudited)
4 Comparison of Selected Hourly Encounter Values Between ValueOptions,
ValueOptions’ Subcontractors, and AHCCCS Fee-for-Service Schedule
Fiscal Year 2005
5 ValueOptions’ Schedule of Administrative Expenses by Category
Fiscal Year 2005
(Unaudited)
Figures:
1 SMI Enrollment
In Maricopa County and Other Regions in Arizona
Fiscal Years 2001 through 2005
2 Arizona Behavioral Health Services Funding (All Populations)
Fiscal Years 2001 through 2005
(Unaudited)
Office of the Auditor General
TABLE OF CONTENTS
page xi
concluded
8
14
16
37
38
Figures: (Concl’d)
3 ValueOptions’ SMI Revenues and Enrollment
Fiscal Years 2001 through 2005
4 Flow of Sources and Distributions of
Behavioral Health Services Monies in Arizona
Fiscal Year 2005
In Millions
(Unaudited)
5 ValueOptions’ SMI Expenses by Types of Services Delivered
Fiscal Year 2005
(Unaudited)
6 Legislative Appropriations for
Behavioral Health Services for Adults with SMI
Fiscal Years 2002 through 2007
7 ValueOptions’ Medicaid Programs Losses and Profits
In Millions of Dollars
Fiscal Years 2002 through 2005
(Unaudited)
State of Arizona
page xii
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The Office of the Auditor General has conducted a special audit of the delivery of
behavioral health services to adults with serious mental illness (SMI) in Maricopa
County pursuant to Laws 2005, Chapter 256, Section 1. The audit was conducted
under the authority vested in the Auditor General by Arizona Revised Statutes (A.R.S.)
§41-1279.03.
Serious mental illness as defined in Arizona
Serious mental illness (SMI) is not a specific mental disorder, but a designation used
by states and the federal government. In Arizona, state laws and the Department of
Health Services’ Division of Behavioral Health Service’s (Division) policy define who
Division’s SMI Eligibility Determination Policy
Eligibility determination for SMI status in Arizona requires having a qualifying psychiatric diagnosis and
a functional impairment as a result of the qualifying diagnosis, as described below:
Qualifying Mental Disorders and Diagnoses
More than 70 standardized psychiatric diagnoses are considered “qualifying SMI diagnoses” in Arizona.
Division policy categorizes them into seven disorders, specifically:
􀁺􇩐 Psychotic disorders 􀁺􇩂 Bipolar disorders
􀁺􇩏 Obsessive-compulsive disorder 􀁺􇩍 Major depression
􀁺􇩏 Other mood disorders 􀁺􇩁 Anxiety disorders
􀁺􇩐 Personality disorders
Not all standardized diagnoses are considered “qualifying diagnoses” for SMI determination. For
example, antisocial personality disorder, which is one of several specific personality disorder diagnoses,
does not qualify for SMI status in Arizona.
Functional Impairment Categories
In addition to a qualifying diagnosis, a person must have a functional impairment as a result of the
diagnosis. Dysfunction should be present for at least 12 months, or at least 6 months with expected
continuation for another 6 months. Impairment must be present in one or more of four impairment
categories, as follows:
􀁺􇩉 Inability to live in an independent or family 􀁺􇩒 Risk of serious harm to self or others
setting without supervision 􀁺􇩉 Inability to perform in specific roles,
􀁺􇩒 Risk of deterioration for example, in school or work
can obtain legal status as an adult with SMI and thereby be entitled to a wide range
of services paid for by the State using Medicaid, KidsCare, State General Fund
monies, and federal grants, and other revenue sources. To obtain SMI designation in
Arizona, a person must be at least 18 years old and have a qualifying psychiatric
diagnosis and resulting functional impairment as determined by a licensed
psychiatrist, psychologist, or nurse practitioner (see text box, page 1). The Division’s
SMI determination policy identifies more than 70 standardized psychiatric diagnoses
from The Diagnostic and Statistical Manual of Mental Disorders as “qualifying SMI
diagnoses.”1 Arizona’s SMI definition is very similar to the federal definition used by
the U.S. Department of Health and Human Services, Substance Abuse and Mental
Health Services Administration.
SMI enrollment in Maricopa County exceeds 18,000
As of fiscal year 2005, the Division reported that more than 18,000 adults with SMI
were enrolled to receive services in Maricopa County, out of a state-wide enrollment
of nearly 31,500 adults. Figure 1 (see page 3) presents state-wide and Maricopa
County’s SMI enrollment trends from fiscal years 2001 through 2005. As shown in
Figure 1, Maricopa County’s total enrollment increased from approximately 13,000 to
approximately 18,000 from fiscal years 2001 to 2005. During all 5 fiscal years,
Maricopa County accounted for the majority of state-wide enrollment.
Contractor administers system
The Department of Health Services contracts with a private company, VO of Arizona,
Inc. (ValueOptions), to administer a behavioral health system in Maricopa County for
adults with SMI, as well as for several other population groups.2 The Division’s duties
include ensuring that ValueOptions complies with its contractual requirements and
overseeing the service system. ValueOptions delivers case management and some
other services directly, and also subcontracts with other service providers.
Division of Behavioral Health Services oversees the contracted
system—The Division does not provide any direct services except at Arizona
State Hospital, but instead contracts with Regional Behavioral Health Authorities
(RBHAs) to administer services in specific geographic service areas within the
State. Arizona established the RBHA system in 1992. RBHAs are managed-care
State of Arizona
page 2
1 Psychiatric diagnoses are standardized and published in The Diagnostic and Statistical Manual of Mental Disorders,
Fourth Edition (DSM-IV), published by the American Psychiatric Association. It is the official reference guide that
psychiatrists and other qualified clinicians use to identify mental disorders and psychiatric diagnoses.
2 The State contracts with VO of Arizona, Inc., an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned
subsidiary of Virginia-based FHC Health Systems. In addition to VO of Arizona, Inc., ValueOptions, Inc. has affiliates that
manage behavioral health systems in several states, including Colorado, Florida, Massachusetts, New Jersey, New
Mexico, North Carolina, and Texas.
Office of the Auditor General
page 3
organizations that the State pays in advance through capitated payment
arrangements.1
The Division is primarily an oversight agency. Many of the Division’s oversight
obligations stem from federal Medicaid requirements reflected in its contract with
the Arizona Health Care Cost Containment System (AHCCCS), Arizona’s Medicaid
agency. Other requirements derive from state statutes and administrative rules. In
Maricopa County, the Division’s oversight also emphasizes compliance with Arnold
v. Sarn lawsuit requirements.The class action lawsuit was filed in 1981 on behalf of
people with serious mental illness in Maricopa County alleging that the State and
the County had not established a comprehensive community mental health
system consistent with Arizona state law. The Superior Court and Arizona Supreme
Court found in favor of the plaintiffs in 1986 and 1989, respectively, and in 1991,
the Court approved The Blueprint: Implementing Services to the Seriously Mentally
Ill (Blueprint) that set forth required system changes. The court approved an exit
stipulation in 1995, and then a supplemental agreement in 1998, that set forth
additional terms for the State to meet. (See Appendix A for summary of Arnold v.
Sarn activities.)
1 The Department of Health Services contracts with four RBHAs to serve the State’s six regions. In addition to ValueOptions
in the Maricopa County region, the Northern Arizona Regional Behavioral Health Authority (NARBHA) serves the northern
region, Cenpatico Behavioral Health serves the Pinal-Gila and Yuma-La Paz regions, and Community Partnership of
Southern Arizona (CPSA) serves the Pima County and southeast regions. In addition, the Department contracts with four
tribal contractors to serve the Gila River, Colorado River, Navajo Nation, and Pascua Yaqui communities.
31,473
25,784
Adults with SMI—Maricopa County Adults with SMI—other regions
18,138
13,335
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2001 2002 2003 2004 2005
Fiscal Year
13,095
12,689
Source: Auditor General staff analysis of number of consumers served as presented in the annual reports for the Arizona Department of
Health Services/Division of Behavioral Health Services and the Arizona State Hospital for fiscal years 2001 through 2005, and
enrollment data reported by ValueOptions for the end of the month of June for 2001 through 2005.
Figure 1: SMI Enrollment
In Maricopa County and Other Regions in Arizona
Fiscal Years 2001 through 20051
1 Due to division information system changes in fiscal years 2003 and 2004, the state-wide totals for those
years may be incomplete.
State of Arizona
page 4
The Division monitors RBHA contract compliance and financial performance;
conducts quality assurance activities, such as performance improvement,
research, and data dissemination; and handles grievances and appeals. In
addition, a clinical services division that consists of several bureaus provides
technical assistance and guidance for RBHAs and service providers related to
best practices in clinical care for adults, children, and substance abusers. In fiscal
year 2006, the Arizona Legislature appropriated a total of 122 FTE positions to the
Department of Health Services to oversee Arizona’s public behavioral health
system. The number of FTE has not significantly changed since fiscal year 2004,
when the number dropped to 120 FTE from 130 FTE in fiscal year 2003.
ValueOptions serves Maricopa County—ValueOptions has operated as
Maricopa County’s RBHA since 1998. ValueOptions, a subsidiary of a Virginia-based
company, is the second RBHA to serve Maricopa County, and it was the first
for-profit company to receive a state RBHA contract. The Department entered into
its most recent 3-year contract with ValueOptions on July 1, 2004. As of March
2006, ValueOptions reported having approximately 2,000 full- and part-time
positions consisting of 473 administrative and 1,525 clinical operations positions
in Arizona.
ValueOptions’ Maricopa County operations include a corporate office, an
intake/evaluation center, intake/assessment and crisis hotline call centers located
in Phoenix, and 23 direct care clinics located throughout the County. ValueOptions
delivers SMI services through a combination of its intake, assessment, and crisis
services, its direct care clinics, and subcontracted service providers. (See text box
for types of services, and Finding 1, pages 13 through 17, for specific definitions.)
􀁺􇩖 ValueOptions direct care clinics: ValueOptions operates 23 direct care sites
located throughout Maricopa County. ValueOptions enrolls each SMI
consumer in one of these direct care clinics. Every clinic has clinical teams
composed of physicians, nurses, certified clinicians, case managers, and
other mental health support staff. (See Finding 2, pages 19 through 29, for
description of a clinical team.) ValueOptions’ case management strategic
plan, which was developed to meet court requirements, states that the most
common clinical team (supportive treatment) should have a caseload no
greater than 30 consumers per case manager. Some teams, called assertive
case management teams, should have caseloads no greater than 12
consumers per case manager in order to provide more intensive services.
􀁺􇩓 Subcontracted services: ValueOptions contracts with more than 100 service
providers who provide both inpatient and outpatient services for adults with
SMI. For example, ValueOptions contracts with hospitals for inpatient services
and human service agencies for treatment services such as counseling and
therapy. ValueOptions’ officials report that they also co-locate some
subcontractor employees at its clinics to improve access for its consumers.
Under its contract with the Division, ValueOptions must comply with
requirements associated with the Arnold v. Sarn lawsuit. For example, Arnold
v. Sarn’s 1991 Blueprint requires that for Maricopa County, only one entity
provides case management services for adults with SMI. Currently,
SMI Service Examples
􀁺􇩃 Case management
􀁺􇩔 Therapy and counseling
􀁺􇩐 Peer support
􀁺􇩃 Crisis intervention
􀁺􇩉 Inpatient services
􀁺􇩍 Medication
􀁺􇩒 Rehabilitation
􀁺􇩄 Day programs
􀁺􇩈 Housing and housing support
􀁺􇩒 Residential services
Office of the Auditor General
page 5
ValueOptions delivers adult case management directly through its clinics.
However, the Division is examining the court order that requires case
management through a single entity to determine whether the current
structure is the most effective way to serve adults with SMI. According to
ValueOptions officials, ValueOptions would support a change to a contract
with a network of contractors for these services, similar to the way case
management is provided in Pima County. (See Appendix A for summary of
Arnold v. Sarn activities.)
As indicated in Table 2, the largest source of ValueOptions’ SMI service revenues is
contract revenue. In addition to state contract revenue, ValueOptions receives other
revenues not related to its contract with the Division, including revenues from third
parties such as Medicare and other insurers. SMI revenues increased by $4 million
Table 2: ValueOptions’ Schedule of SMI Service Revenues and Expenses
Fiscal Years 2004 through 2006
2004 2005 2006
(Actual) (Actual) (Estimate)
Revenues:
Contract Division of Behavioral Health Services revenues $260,476,899 $264,279,151 $300,992,213
Medicare recoveries 443,125 582,704 595,556
Other insurance recoveries 58,340 48,531 93,362
Patient fees (copayments) 7,818 5,057 5,478
Total revenues 260,986,182 264,915,443 301,686,609
Expenses:
Program Services—
Treatment 12,518,043 13,749,414 17,013,324
Rehabilitation 12,479,494 13,910,474 19,493,083
Medical1 8,956,964 12,703,965 17,993,360
Support (including case management)2 89,815,497 101,032,099 121,537,114
Crisis intervention 6,666,818 9,872,859 9,999,689
Inpatient 25,663,299 26,454,083 29,036,144
Residential 17,134,361 17,795,122 16,948,380
Behavioral health day program 3,899,870 6,125,640 4,280,221
Medication 40,216,229 41,080,986 38,738,082
Other 4,833,541 478,255 50,227
Total program services expenses 222,184,116 243,202,897 275,089,624
Administrative Expenses—
Salaries and employee benefits 5,162,391 7,234,547 8,032,378
Professional and outside services 1,417,647 3,803,185 1,976,050
Travel and other 12,318,930 7,895,288 9,897,180
Depreciation 507,360 958,783 1,566,863
Total administrative expenses 19,406,328 19,891,803 21,472,471
Income tax provisions 7,682,557 723,670 2,037,225
Total expenses 249,272,390 263,818,370 298,599,320
Net income $ 11,713,181 $ 1,097,073 $ 3,087,289
1 According to ValueOptions, medical expenses have increased significantly since fiscal year 2004 due to an increased utilization of services. These
services include medication services, medical management, laboratory, radiology/medical imaging, and electro-convulsive therapy services.
2 Support (including case management) is expected to increase from the fiscal year 2005 total of $101 million to $121.5 million in fiscal year 2006. In fiscal
year 2005, when these expenses increased from fiscal year 2004, VO of Arizona, Inc. reported adding more than 400 new case manager and other
positions in its clinics. According to VO of Arizona, Inc. personnel, this staff was added primarily in response to deficiencies identified in the 2004
Independent Review by the Office of the Monitor.
Source: Auditor General staff analysis of the Arizona Division of ValueOptions, Inc.’s Financial Statements and Supplemental
Schedules for fiscal year 2004 and VO of Arizona, Inc.’s Financial Statements and Supplemental Schedules for fiscal year
2005, audited by an independent CPA firm, and ValueOptions-prepared estimates for fiscal year 2006.
between fiscal years 2004 and 2005, while SMI expenses increased more
significantly, which resulted in ValueOptions earning less net income from the
SMI program in fiscal year 2005. Annual service-related costs per SMI enrollee in
Maricopa County increased by approximately $300 between 2004 and 2005 (see
text box). ValueOptions expected total SMI revenues and expenses to increase
in fiscal year 2006. See Finding 1 (see pages 13 through 17) for more information
on the Division’s distribution of behavioral health monies to ValueOptions, and how
much of ValueOptions’ SMI revenues were spent in its direct care clinics (in-house
expenses) compared to its subcontracted service providers.
Arizona has well-funded mental health system
Arizona, once considered at the bottom rung of the ladder in state mental health
spending, has now risen to within the top ten among the states. Specifically, in
November 2005, the National Association of State Mental Health Directors Research
Institute ranked Arizona as tenth in overall mental health expenditures, and seventh
in per-capita mental health expenditures (based on 2003 expenditure data).1
Arizona’s behavioral health system is funded through a combination of federal, state,
and other government funding sources. Specifically:
􀁺􇩍 Medicaid: Medicaid monies consist of a blend of federal and state monies. The
Department of Health Services receives these monies from AHCCCS. The
states appropriate monies for their Medicaid programs and the federal
government matches those monies. The Arizona Legislature appropriates one-third
of Arizona’s Medicaid funding and the federal match accounts for the
remaining two-thirds.
􀁺􇩋 KidsCare: The Department of Health Services also receives KidsCare monies
from AHCCCS. Like Medicaid, KidsCare monies also consist of a blend of
federal and state monies. The Arizona Legislature appropriates state funding,
and the federal government matches the state monies. In general, KidsCare
pays for medical and behavioral health services for youths up to age 19, as well
as for the parents of the youths enrolled in KidsCare (called “KidsCare Parents”)
who do not qualify for Medicaid. Some 18-year-olds, and adults enrolled in the
KidsCare Parents program who are determined to have a serious mental illness,
can have their behavioral health services paid with KidsCare monies.
􀁺􇩓 State General Fund appropriations: In addition to appropriations for the state
match portion of Medicaid and KidsCare monies, the Arizona Legislature
appropriates General Fund monies to pay for services not covered by Medicaid.
For example, these monies can be used to pay for room and board for Medicaid
State of Arizona
page 6
1 The Institute did not compare how the states ranked with regard to funding for only adults with SMI.
Annual Service-Related Costs
Per SMI Enrollee in Maricopa County
2004 $13,137
2005 $13,408
enrollees, or to pay for services for people who do not qualify for Medicaid or
KidsCare, but who otherwise qualify for behavioral health services.1
􀁺􇩏 Other government funding: Other government funding consists of revenues
from federal block grants, county funds, and other local government monies,
and non-General Fund state appropriations. For example, in 2000 the
Legislature appropriated more than $40 million in one-time monies from the
State’s tobacco litigation settlement monies to pay for housing, vocational
rehabilitation, and other recovery support services for adults with SMI.2 Other
sources of funding include federal block grants, intergovernmental agreements,
and monies from local governments.
As shown in Figure 2, Arizona’s total behavioral health funding—including funding for
children’s services, general mental health, substance abuse, and division
administration as well as funding for adults with SMI—has more than doubled
between fiscal years 2001 and 2005, with much of the increase being paid for by
increased Medicaid revenues. Two factors help explain this increase. First, in 2000,
Arizona voters approved Proposition 204, expanding eligibility for Medicaid starting
Office of the Auditor General
page 7
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Medicaid KidsCare State General Fund Other Government
Millions
2001 2002 2003 2004 2005
1 General Fund and other government monies are limited and are not considered entitlement monies like Medicaid and
KidsCare monies. The Division requires the RBHAs and tribal contractors to set priorities for how these limited monies
will be spent within their respective service regions.
2 The program was more commonly known as the HB2003 program for the original legislation that authorized the one-time
funding. See Auditor General Report No. 04-03 for additional information on the HB2003 program and the SMI programs
and services developed with one-time funding from tobacco litigation settlement monies.
Source: Auditor General staff analysis of state-wide behavioral health services funding for fiscal years 2001 through 2005 as presented in
the annual reports for the Arizona Department of Health Services Division of Behavioral Health Services and Arizona State Hospital
for fiscal years 2001 through 2005.
Figure 2: Arizona Behavioral Health Services Funding (All Populations)
Fiscal Years 2001 through 2005
(Unaudited)
in 2001. The proposition expanded income eligibility requirements up to 100 percent
of the federal poverty level, greatly increasing Arizona’s Medicaid enrollment. This
change expanded Medicaid spending significantly. Starting in fiscal year 2002, the
Division received additional Medicaid monies (both state and federal matching
monies) to provide services to people made eligible by the Proposition 204
expansion. Population growth in Arizona also played a factor as it also helped
increase the number of people eligible for Medicaid-funded services in Arizona. At
the same time the eligibility expansion took effect, Arizona began covering a broader
array of behavioral health services in its Medicaid program. All of these changes
contributed to increased uses of Medicaid monies to pay for behavioral health
services.
ValueOptions’ SMI revenues compared to adults served
Similar to state-wide mental health funding, ValueOptions also received more funding
to serve adults with SMI between fiscal years 2001 through 2005. Figure 3 compares
the growth in ValueOptions’ SMI service revenues to SMI enrollment for fiscal years
2001 through 2005. SMI revenues increased significantly between 2001 and 2003,
primarily due to the effects of increased Medicaid funding. Figure 3 shows that
although ValueOptions was receiving more revenues to serve adults with SMI
between fiscal years 2001 through 2004, it was serving more people during these
State of Arizona
page 8
$122.2 $193.4 $239.8 $261.0 $264.9
13,095
15,339
14,279
18,138
$0
$50
$100
$150
$200
$250
$300
2001 2002 2003 2004 2005
Fiscal Year
Revenues (Millions) 0
5
10
15
20
25
Enrollment (Thousands)
Revenues Enrollment
Source: Auditor General staff analysis of the Arizona Division of ValueOptions, Inc.'s Financial Statements
and Supplemental Schedules for fiscal years 2001 through 2004, VO of Arizona, Inc.'s Financial
Statements and Supplemental Schedules for fiscal year 2005, audited by an independent CPA firm,
and the number of consumers served as reported by ValueOptions in its monthly enrollment reports.
16,913
Figure 3: ValueOptions’ SMI Revenues and Enrollment
Fiscal Years 2001 through 2005
years, with annual increases of over 1,000 people. According to ValueOptions
reports, ValueOptions served more than 18,000 adults with SMI in fiscal year 2005,
and it did so with approximately the same amount of revenues as it received in fiscal
year 2004.
Scope and methodology
Laws 2005, Chapter 256, Section 1, requires the Office of the Auditor General to
assess the Department’s delivery of behavioral health services to adults with serious
mental illness in Maricopa County. This audit focuses on the following main topics:
􀁺􇩈 How the money for adults with SMI is being spent in Maricopa County.
􀁺􇩗 Whether there is an adequate focus on the services’ outcomes.
􀁺􇩔 The use of SMI monies and how effectively the Division conducts financial
oversight.
􀁺􇩈 How effectively the Division reviews the levels and costs of services reported by
ValueOptions and its subcontractors.
The audit contains four findings and associated recommendations:
􀁺􇩉 In fiscal year 2005, ValueOptions spent the vast majority of SMI funding on a
wide variety of services, with approximately 40 percent spent on support
services including case management.
􀁺􇩔 The Division should strengthen its focus on consumer outcomes to better
account for what its expenditures accomplish.
􀁺􇩁 Although many of the Division’s approaches for monitoring solvency and
expenditures are working reasonably, the Division can strengthen its
requirements to provide greater assurance that monies are being spent
appropriately.
􀁺􇩒 Requirements designed to ensure that SMI funding is being spent on providing
services to consumers need to be strengthened.
In addition, this report contains Other Pertinent Information regarding ValueOptions’
overall fiscal year 2005 administrative expenses (see pages 47 through 48).
Various methods were used to study the issues addressed in this audit. General
methods included interviews with division officials and staff, and ValueOptions’
executive management team members and other staff. Auditors also reviewed
Arizona Revised Statutes, Administrative Rules, and the Division’s policies and
Office of the Auditor General
page 9
procedures as well as information about its goals, objectives, and performance
measures. In addition, auditors reviewed provisions in the State’s contract with the
Maricopa County Regional Behavioral Health Authority and various court documents
associated with Arnold v. Sarn such as the 1986 judgment, 1989 Supreme Court
opinion, 1991 Blueprint, 1995 exit stipulation, 1998 supplemental agreement, the
2004 and 2005 independent review reports, and more recent related documentation.
Auditors also used specific methods to develop each finding:
􀁺􇩄 Determining how service dollars for adults with SMI were spent in fiscal year
2005—To establish service categories, auditors reviewed the Division’s Covered
Services Guide, which describes the various types of covered behavioral health
services. To understand how monies flow in the system and how monies were
spent, auditors reviewed, collected, and analyzed information from a number of
sources, including AHCCCS’ contract with the Division; financial schedules the
Division reported in its Annual Report for fiscal year 2005; audited financial
statements of VO of Arizona, Inc., for fiscal year 2005; and an electronic
download of the data that external auditors PricewaterhouseCoopers used in
the fiscal year 2005 audit of VO of Arizona, Inc.’s financial statements.1
􀁺􇩄 Determining what services are accomplishing among adults with SMI who
receive them—To understand the reasons for service provision problems
experienced by some adults with SMI in Maricopa County, auditors conducted
ten case studies of consumers whose needs were deemed as “not met” by the
Arnold v. Sarn Court Monitor in 2005. The case studies consisted of client file
reviews, including reviews of client progress notes, interviews with case
managers, reviews of client demographic and service data (encounters), and
several interviews with the court monitor.
To understand issues that affect service delivery in Maricopa County, auditors
obtained the input of behavioral health experts and others who are familiar with
service planning and provision through a number of activities, including:
􀁼􇱔 Two focus groups consisting of division and ValueOptions clinical advisors
who are experts in behavioral health services assigned to clinics to provide
guidance to staff;
􀁼􇱁 An online Web-based discussion with 14 behavioral health experts, and
interviews with an additional 5 behavioral health experts with questions
similar to those posed to the Web-based discussion participants.
Seventeen of the experts’ expertise is based on local
experience/perspective, and two of them have expertise based on a
national perspective/experience; and
􀁼􇱏 Observation of a Boston University Recovery Training overview given by a
behavioral health expert, and attendance at division oversight meetings
State of Arizona
page 10
1 Although it is more commonly known as ValueOptions, VO of Arizona, Inc. is the legal name of the Maricopa County
RBHA. VO of Arizona, Inc. is an Arizona-based subsidiary of ValueOptions, Inc., a wholly owned subsidiary of Virginia-based
FHC Health Systems.
with ValueOptions and parties involved with the Arnold v. Sarn lawsuit,
community advocate briefing meetings led by the ValueOptions’
administrators, and ValueOptions’ clinical team meetings.
Finally, to identify best practices in measuring behavioral health outcomes and
recovery in managed care systems, and to understand the Division’s quality
management activities and requirements, auditors reviewed literature and
reports such as journal articles and literature related to measuring recovery
outcomes and incorporating outcome measurement into government oversight
of managed care entities; provisions in the Division’s contracts with AHCCCS
and ValueOptions related to performance measures and financial incentives;
Boston University reports on Individual Service Plan (ISP) production and
training methods; the 2003 and 2004 Arizona Department of Health Services
Independent Case Reviews conducted by an independent third party; and the
Division’s 2003 ADHS Consumer Survey State Report, which is its most recent.
􀁺􇩁 Assessing the Division’s effectiveness in providing financial oversight of funding
for adults with SMI in Maricopa County—To assess the adequacy of the
Division’s financial oversight activities, auditors reviewed the requirements set
forth in AHCCCS’ contract with the Division, as well as the Division’s contract
with VO of Arizona, Inc; obtained and reviewed AHCCCS standards related to
financial oversight in a managed behavioral healthcare system; obtained and
reviewed the Division’s analysis of ValueOptions’ compliance with financial
standards; and reviewed ValueOptions’ audited financial reports and the
findings of the external auditors’ fiscal year 2005 OMB A-133 audits of VO of
Arizona, Inc.
􀁺􇩁 Assessing the adequacy of the Division’s oversight of service data (encounters)
and service utilization—To assess the adequacy of the Division’s oversight of
level of services delivered through encounter data, auditors obtained an
electronic download of fiscal year 2005 data that VO of Arizona, Inc. reported to
the Division. Auditors analyzed a subset of this data comprising more than
814,000 electronic service records reported to be valued at $21.1 million
associated with ValueOptions’ in-house clinical and subcontracted services. The
analysis included service records where the service was delivered in fiscal year
2005, the service was delivered to a consumer designated as SMI, the Division’s
computer system had received the record by November 2005 and marked the
record approved, and the type of service was listed on AHCCCS’ fee schedule
with a rate that was updated as of July 15, 2005. Auditors analyzed the
encounter data to compare the cost values of services provided by
ValueOptions in-house to the cost values of the services provided by
ValueOptions’ subcontractors and the State’s fee-for-service schedule.
􀁺􇩏 Other Pertinent Information—To gather information on ValueOptions’ fiscal year
2005 administrative expenses, auditors reviewed VO of Arizona, Inc.’s audited
Office of the Auditor General
page 11
financial statements for fiscal year 2005, and an electronic download of the data
that external auditors PricewaterhouseCoopers used in its fiscal year 2005 audit
of VO of Arizona, Inc.’s financial statements.
􀁺􇩉 Introduction and Background and Appendix A—To document the definition of
serious mental illness and trend information on the number of adults being
served in Maricopa County, auditors documented definitions set forth in federal
and state laws and the Division’s SMI determination policy, and information on
the number of clients served as reported in the Division’s annual reports for fiscal
years 2000 through 2005 and ValueOptions’ enrollment data for the same
timeframe. To document the Division’s responsibilities and the responsibilities of
its contractor, VO of Arizona, Inc., auditors reviewed several sources, including
the Division’s annual reports; unaudited information from the Division’s Web site
and other agency-prepared documents; unaudited information from AHCCCS’
Web site and the AHCCCS contract with the Department of Health Services; and
VO of Arizona, Inc.’s unaudited company-prepared information, including
information published on VO of Arizona, Inc. and ValueOptions, Inc.’s Web
sites.To understand how SMI monies were spent in fiscal years 2004 and 2005,
and projected 2006 expenses, auditors reviewed audited financial statements of
the Arizona Division of ValueOptions, Inc. for fiscal year 2004, and VO of Arizona,
Inc.’s audited financial statements for fiscal year 2005, and its 2006 estimates.1
To document mental health expenditure trends in Arizona, auditors analyzed
information reported in the Division’s annual reports for fiscal years 2001 through
2005, and information reported in a November 2005 report published by the
National Association of State Mental Health Program Directors Research
Institute. To compare the growth in ValueOptions’ SMI service revenues to SMI
enrollment for fiscal years 2001 through 2005, auditors analyzed information
reported in audited financial statements for the Arizona Division of ValueOptions,
Inc. (for fiscal years 2001 through 2004) and VO of Arizona, Inc.’s financial
statements for fiscal year 2005, and compared this information to the number of
SMI enrollees served, as reported by ValueOptions for fiscal years 2001 through
2005.
To develop Appendix A, auditors reviewed and analyzed Arnold v. Sarn court
documents previously mentioned.
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director of the Department
of Health Services, her staff at the Division of Behavioral Health Services, and
ValueOptions for their cooperation and assistance throughout the audit.
State of Arizona
page 12
1 VO of Arizona, Inc. was officially incorporated as an Arizona-based corporation in July 2004 after the start of fiscal year
2005, which began July 1, 2004 and ended June 30, 2005.
Office of the Auditor General
page 13
SMI monies fund a diverse range of services in
Maricopa County
In Maricopa County, most monies appropriated for SMI are spent primarily on a
diverse range of services. Of the total revenues ValueOptions received during fiscal
year 2005, nearly 50 percent went to provide services for adults with SMI, 40 percent
went to provide services to children and other adults, and slightly more than 10
percent went for ValueOptions’ administrative costs, taxes, and profit. Among
services for adults with SMI—the primary focus of this audit—support (which
includes case management services such as helping identify needed resources and
monitoring delivery of other services) accounted for about two-fifths of the
expenditures. The rest went to such services as medication, inpatient and residential
care, rehabilitation, and crisis intervention. ValueOptions personnel provided most of
the case management, other support, and crisis intervention services, while
subcontractors provided nearly all of the other services.
ValueOptions received about half of State’s behavioral
health funding
In fiscal year 2005, ValueOptions received about half of the State’s behavioral health
monies and used about half of these revenues to provide services to adults with SMI.
The overall flow of monies through the system is shown in Figure 4 (see page 14). As
the figure shows, a combination of federal, state, and county monies fund the
behavioral health system in Arizona. For fiscal year 2005, the Division received a total
of $920.8 million to oversee and contract for behavioral health services in Arizona.
ValueOptions received $489.4 million for programs in Maricopa County.1 Of this
amount, ValueOptions used $243.2 million for programs for adults with SMI and
$196.4 million to provide other services, of which 53 percent were for children.
Nearly all ValueOptions’ Arizona revenues come from its contract with the Division. In
fiscal year 2005, ValueOptions received $2 million of revenues from other sources,
including interest and recoveries from Medicare and other insurers. In total,
FINDING 1
State of Arizona
page 14
Federal $527.0
State 350.1
County 37.4
Other 6.3
Total $920.8
State-wide Program
Distribution $920.8
Amount used to provide services to
adults with SMI $ 243.2
ValueOptions1 $489.4 Other RBHAs, tribal contractors,
and other adjustments2 $416.8
BHS
Administration $14.6
Amount used to provide
other services $ 196.4
ValueOptions
Administration $36.8
Profit 7.9
Income Taxes 5.2
Expenses for services provided by
subcontractor providers $151.7
Expenses for services provided by
ValueOptions $91.5
Figure 4: Flow of Sources and Distributions of
Behavioral Health Services Monies in Arizona
Fiscal Year 2005
In Millions
(Unaudited)
1 ValueOptions received an additional $2 million from other sources, including interest and recoveries from
Medicare and other insurers. All these monies were used for administration, profit, and income taxes.
2 The Department contracts with three other RBHAs and four tribal contractors. In addition, an insignificant
adjustment was made to account for the difference between the Division's cash basis and ValueOptions’ accrued
amounts.
Source: Auditor General staff analysis of Arizona Department of Health Services Division of Behavioral Health Services and Arizona State
Hospital Annual Report Fiscal Year 2005, an electronic file obtained from ValueOptions containing financial statement data for
fiscal year 2005, and VO of Arizona, Inc. Statement of Activities Year Ended June 30, 2005.
Office of the Auditor General
page 15
ValueOptions received $491.4 million from all sources. From all of its revenue sources,
ValueOptions earned $8.8 million in profits (1.79 percent of revenues), used $37.2
million to pay for administrative expenses (7.57 percent), and incurred $5.8 million in
income taxes associated with its Arizona operations (1.18 percent). Administrative
expenses associated with the division contract totaled $36.8 million, which is
substantially in compliance with the contractual requirement limiting administrative
expenses to 7.5 percent of each type of contract revenue. See Other Pertinent
Information (pages 47 through 48) for more information on ValueOptions’
administrative expenses.
Largest category of adult SMI services is support,
including case management
The $243.2 million for services to adults with SMI was used for many different kinds of
services. As Figure 5 (see page 16) shows, support services, which includes case
management, was by far the largest category, representing about 42 percent of total
service expenditures. ValueOptions provided most of the support services. Nearly all
of the other categories of services were provided primarily by subcontractors. The
types of services were as follows:
􀁺􇩓 Support services ($101 million)—Mainly case management services that help
consumers obtain behavioral health services via ValueOptions direct care sites
or through subcontractors. Specifically, case managers help consumers obtain
services and monitor service delivery. Other support services include respite
care, peer support, home care training, transportation, helping consumers find
resources such as housing and carrying out daily tasks such as assisting with
food preparation, and ensuring that medications are taken as prescribed.
􀁺􇩍 Medication ($41.1 million)—Prescription drugs intended to prevent, stabilize, or
improve symptoms due to a behavioral health condition or its treatment.
􀁺􇩉 Inpatient services ($26.5 million)—Inpatient detoxification and psychiatric
services delivered in hospitals and other inpatient facilities, including residential
treatment centers that provide a structured treatment setting with 24-hour
supervision, an intensive treatment program, and on-site medical services.
􀁺􇩒 Residential services ($17.8 million)—Twenty-four-hour residential services,
including structured treatment, which includes room and board, delivered in
residential facilities or supported independent living settings.
State of Arizona
page 16
􀁺􇩒 Rehabilitation services ($13.9 million)—Education, coaching, training, and other
services, including securing and maintaining employment. Services include
living skills training, cognitive rehabilitation, health promotion, and ongoing
support to help maintain employment.
􀁺􇩔 Treatment services ($13.7 million)—Counseling, therapy, assessment,
evaluation, screening, and other professional services to reduce symptoms and
promote consumer functioning.
7.5
3
79.9
6.1
11.6
13.7
13.9
17.8
26.5
38.1
21.1
1.1
2.4
$0 $20 $40 $60 $80 $100 $120
Millions
In-House Subcontractors
Medication
Inpatient
Residential
Rehabilitation
Treatment
Medical
Crisis intervention
Day programs
In-house total expenses = $91.5 million
Subcontractors' total expenses = $151.7 million1
Support (including
case management)
1 Includes an additional $500,000 of miscellaneous behavioral health services delivered by subcontractors.
Source: Auditor General staff analysis of an electronic file obtained from ValueOptions containing financial statement data for fiscal year 2005, and
VO of Arizona, Inc. Statement of Activities Year Ended June 30, 2005.
Figure 5: ValueOptions’ SMI Expenses by Types of Services Delivered
Fiscal Year 2005
(Unaudited)
􀁺􇩍 Medical services ($12.7 million)—Services to reduce a person’s symptoms and
improve or maintain functioning, including laboratory, radiology, and medical
imaging. Medical services also include medication management, which is the
review of medication effects and side effects, and adjusting the type and
dosage of prescribed medications.
􀁺􇩃 Crisis intervention services ($9.9 million)—Telephone crisis lines, mobile crisis
intervention units, and crisis services delivered at two psychiatric recovery
centers (PRCs) managed by ValueOptions.
􀁺􇩄 Day programs ($6.1 million)—Skills training and development, behavioral health
prevention/promotion, medication training and support, ongoing support to
maintain employment, and self-help/peer services to improve consumers’ ability
to function in the community.
􀁺􇩏 Other ($478,000)—Other behavioral health services include some community
housing, vocational, screening, and evaluation services. This amount includes
approximately $400,000 in Tobacco Litigation Settlement Fund monies that the
Division allocated to ValueOptions in fiscal year 2005. (See Auditor General
Report No. 04-03 for additional information on SMI community housing
developed with one-time funding from tobacco settlement monies.)
Office of the Auditor General
page 17
State of Arizona
page 18
Office of the Auditor General
page 19
Division should strengthen focus on outcomes
The Division should strengthen its focus on consumer outcomes to better account
for what expenditures on services for adults with SMI accomplish. To date, the focus
on what expenditures are accomplishing has been limited as the Division continues
to implement basic system requirements. The Division is attempting to move its
program in a results-oriented direction, in part by adopting a recovery-based model
aimed at helping people make progress. However, the Division may experience
difficulty in moving further in this direction, in large part because it must measure
numerous process requirements in order to comply with federal, state, and Arnold v.
Sarn lawsuit requirements. To strengthen its focus on consumer outcomes, the
Division should continue implementing outcome-based training, continue
developing outcome goals and measures in its quality management system and
RBHA contract, and ensure that the data it collects to measure outcomes is accurate.
In addition, the Division should consider working with Arnold v. Sarn plaintiffs to
renegotiate criteria for exiting the lawsuit.
Limited focus to date on what system
expenditures accomplish
The Division has had limited focus on whether its
expenditures are helping consumers make progress in their
recovery. Research shows that many adults with SMI can
recover, or make progress, and live personally meaningful
and fulfilling lives. Experts believe that a public mental health
system’s service planning and clinical practices should be
recovery-based (see text box). To date, there has been
limited focus on what is being accomplished through case
management and support services, including service
planning by clinical teams, or what consumer outcomes are
as a result of the services they receive. However, the Division
and ValueOptions are beginning to focus on consumer
outcomes.
FINDING 2
What Recovery Means1,2
To consumers—Being able to participate in
meaningful activities, assume responsibilities,
and/or overcome disadvantages such as
discrimination after being categorized mentally ill.
To the Division—Ensuring that the RBHAs provide
services that facilitate a consumer’s progress, and
focusing its oversight on measuring consumer
recovery as a result of those services.
1 Anthony, William A. A Recovery-Oriented Service System:
Setting Some System-Level Standards. Psychiatric
Rehabilitation Journal, Fall 2000. 159-168, Vol. 24, No. 2.
2 Anthony, William A. Recovery from Mental Illness: The
Guiding Vision of the Mental Health Service System in the
1990’s. Psychosocial Rehabilitation Journal, 1993. 11-23,
Vol. 16 No. 4.
State of Arizona
page 20
Service planning focuses on process—Behavioral health experts believe
outcome goals should determine the services provided by considering consumer
improvement when developing long-term objectives, making assessments, and
identifying needs. However, several experts and clinical advisers who participated
in auditors’ focus groups believe that the Division and ValueOptions focus on the
process of service delivery rather than the level of progress that consumers
achieve.1
One example of the emphasis on process is the recent effort to meet quotas,
which according to ValueOptions’ management, requires staff at the various clinics
to meet site-specific, monthly goals for developing individual service plans (ISPs),
which are written plans showing consumers’ needed services. To comply with
Arnold v. Sarn court agreements, consumers must have ISPs. Case reviews by the
court monitor in 2004 and 2005 found a high rate of consumers without adequate
ISPs, and since then the Division and ValueOptions have emphasized the need to
develop ISPs for consumers.
The increased emphasis on meeting ISP quotas may help clinical teams develop
the required number of ISPs, but available evidence indicates that teams may not
always create meaningful plans appropriate for consumer needs (see text box for
a listing of these needs). Boston University mental health system experts observed
ValueOptions’ clinical teams in May 2005. The Boston University experts
conducted a review at six clinics and reported that the teams had difficulty setting
personalized ISP goals and lacked the ability to identify consumer needs and
develop appropriate objectives to help consumers make progress in their
recovery. Clinical advisers in auditors’ focus groups confirmed Boston University
experts’ report that the clinical teams did not view the ISP as a planning tool to help
link consumers to needed services for long-term progress. Auditors’ review of case
files showed an example of the problem:2
􀁺􇩌 Lisa, a 58-year-old woman with a psychotic disorder, received services valued
at approximately $4,800 in fiscal year 2005. She expressed to her case
manager that she has financial problems. However, she is not ready to work,
but would like to move to a more affordable apartment. Although her ISP
reflects this goal, her case manager believes that her living situation is
adequate, and there has been little effort to help Lisa find a less expensive
place to live. According to agency rules, if the goal is appropriate, the team
should help Lisa work toward achieving it.
Clinical team efforts not adequately coordinated—Effective supervision
and clinical team practices are important to implementing policies focused on
consumer progress, according to behavioral health experts. These experts believe
1 Behavioral health experts participated in a Web-based discussion and clinical advisers participated in two focus
groups as part of audit methods (see Introduction and Background, pages 9 through 12). Clinical advisers are experts
in behavioral health services, employed by the Division or ValueOptions, and assigned to several clinics to provide
guidance to staff during calendar years 2004 and 2005.
2 To identify causes for problems with service delivery, auditors conducted ten case studies on consumers who were
identified in the Arnold v. Sarn court monitor’s 2005 review as having unmet needs according to their ISPs. All
consumer names have been changed. These cases are used for illustrative purposes and are not meant to tell the
whole story.
Consumer needs to
address in service plan
goals1
􀁺􇩓 Safety and other basic
needs (food and shelter)
􀁺􇩁 Access to resources
􀁺􇩓 Symptom relief
􀁺􇩁 Assumption of
responsibilities
􀁺􇩈 Health
􀁺􇩅 Empowerment
􀁺􇩅 Equal opportunity
1 Anthony, William A. A Recovery-
Oriented Service System: Setting
Some System-Level Standards.
Psychiatric Rehabilitation Journal,
Fall, 2000. 159-168, Vol 24, No.2.
Clinical teams may not
always create meaningful
plans appropriate for
consumer needs.
Office of the Auditor General
page 21
that the team should engage the consumer in creating his or her ISP
and use team member expertise to implement it (see text box).
In contrast, experts and clinical advisers identified lack of effective
coordination both within the ValueOptions team and between the
team and other providers. In the May 2005 Boston University review,
experts found that in general, clinical teams in Maricopa County
were not prepared to use resources and supports from the clinical
team to implement the ISP. Clinical advisers also observed this lack
of collaboration among clinical teams. Specifically, advisers in one
focus group noted that members of clinical teams do not
coordinate their efforts or follow up with one another. Further,
advisers in the other focus group said teams lack the ability to use team resources
to match services to consumer needs. An auditor case study shows that the
problem persists:
􀁺􇩔 Tammy, a 37-year-old woman with bipolar disorder, received services valued
at approximately $14,850 in fiscal year 2005. According to her clinical team,
she has not made progress in her substance abuse treatment. She
experienced staff turnover within the team with four new case managers over
an 18-month period, and it appears that the team did not communicate
effectively during times of transition. Each time she had a new case manager,
the team would start over with treatment options. For example, Tammy
attended a substance abuse program for which she expressed dislike, and
later, when a new case manager joined the team, that person referred her to
the program that she did not want to attend. To ensure that Tammy received
consistent guidance to help her progress in her substance abuse treatment,
her clinical team should have communicated and followed up with one
another when someone new joined the team.
In addition to inadequate coordination within the clinical team, ValueOptions’
teams do not always coordinate with others outside the teams. For example,
clinical advisers in one focus group stated that the teams do not consistently
communicate with service providers or follow up with them while consumers are
receiving services. One expert who participated in auditors’ Web-based discussion
also stated that there is a lack of collaborative planning with providers and another
expert commented that there is a lack of interaction between clinical teams and
consumers’ primary care physicians. In addition, auditors found evidence of
clinical teams’ lacking integration of consumers’ legal obligations into their service
planning, such as court-ordered treatment, including a lack of communication with
consumers’ parole officers. Here is an example of a lack of coordination with
providers outside the team, taken from the cases the auditors examined:
􀁺􇩊 Jeff is a 55-year-old man with schizophrenia who received services valued at
approximately $13,330 in fiscal year 2005. His clinical team arranged for a
provider to assist him with medication management to ensure that he takes
his medications as prescribed. While his clinical team coordinated their efforts
internally, the team did not verify that the provider observed Jeff taking his
Clinical teams do not
consistently coordinate
efforts with service
providers.
Typical clinical team members1
􀁺􇩃 Case manager
􀁺􇩃 Clinical liaison (supervisor)
􀁺􇩐 Psychiatrist
􀁺􇩎 Nurse
􀁺􇩒 Rehabilitation specialist
􀁺􇩏 Other professionals as needed
1 A.A.C. R9-21-101(B)14.
medication to ensure that he took the proper dosages. The case manager
later discovered that the consumer was over-medicating himself and that the
provider was not delivering services according to their agreement. To assist
Jeff in effectively managing his medication and reducing the symptoms of his
mental illness, the clinical team should have followed up more effectively with
the service provider to ensure close management of Jeff’s medication.
Division beginning to implement recovery model—To improve service
delivery and to comply with Arnold v. Sarn court requirements (see Appendix A,
page a-iii), the Division and ValueOptions are working with the experts from Boston
University who conducted the May 2005 clinical review. These experts have
proposed a model for using consumer recovery in service planning for Maricopa
County. The model includes specific guidelines for helping consumers set long-term
goals and a planning matrix to help the clinical team identify the types of
services that will be most helpful to the consumer. In addition, the model includes
suggestions for helping clinical teams in Maricopa County improve their
understanding of mental illness and their ability to identify client needs and
establish client objectives based on recovery.
In its November 2005 joint stipulation with the Arnold v. Sarn plaintiffs, the Division
agreed to implement Boston University’s training program based on the principles
of consumer recovery. The purpose of the training is to help clinical teams develop
skills to substantively involve consumers in creating recovery and rehabilitation-oriented
ISPs.
To allow consumer recovery to drive services and to facilitate effective supervision
and clinical team interaction, the Division should continue implementation of the
Boston University training program, maintain the recovery model in service
planning and clinical practices, ensure that the Maricopa County RBHA continues
to train clinical leadership and staff, and monitor RBHA compliance with the
recovery model (see text boxes).
Requirements may impede implementation of recovery
model
While adoption of the recovery model may help address the underlying concerns of
the Arnold v. Sarn lawsuit, some aspects of complying with the settlement of the
lawsuit may have the effect of limiting the Division’s ability to do so. Instead of
measuring outcomes, the Division has focused its measurement on compliance with
process requirements. In addition to monitoring procedural requirements that are
conditions for receiving federal Medicaid funding, the Division must comply with
requirements laid out in court orders associated with the Arnold v. Sarn lawsuit.
State of Arizona
page 22
The Division must comply
with requirements laid out
in court orders
associated with the
Arnold v. Sarn lawsuit.
Recommendation from
experts who participated in
auditors’ Web-based
discussion: Ensure that
clinical teams are properly
trained in the recovery
model.
Recommendation from
clinical advisers: Implement
the Boston University
recovery model and maintain
and monitor it.
Boston University
Training Plan for
Maricopa County
􀁺􇩔 Teaches how to facilitate
consumer recovery.
􀁺􇩃 Certified participants will be
able to use the model and
coach others.
􀁺􇩃 Core group will be certified
in July 2006.
Court requirements drive measurement toward process and
outputs—Court orders associated with the Arnold v. Sarn lawsuit establish
numerous requirements that the Division must meet (see Appendix A, page a-iii).
Agreements between the Division and the plaintiffs prescribe numerous process
requirements for service planning, clinical practices, and oversight, which
contribute to the Division’s lack of focus on consumer
outcomes in these areas. For example, the 1991
Blueprint, a plan for fully implementing the Court’s
judgment, includes specific requirements for clinical
team composition, spells out responsibilities and
processes that the State must follow in the development
and implementation of ISPs, and establishes provisions
for a quality assurance system (see text box). The
Blueprint stipulated that various requirements be
incorporated into the Department’s rules, including
grievance processes, consumer rights, ISP development
and implementation, and standards for residential and
nonresidential services.
To measure compliance with Arnold v. Sarn requirements,
court orders mandate an annual review by a court
monitor. The court monitor follows court requirements by
reviewing a sample of consumers’ cases to measure
compliance with standards, including clinical team
composition, and whether consumers’ ISPs are reviewed
every 6 months and consumers participate in their ISP
development. However, the court-ordered review is not
designed to measure consumers’ progress toward
recovery outcomes over time, but rather focuses on each
consumer’s status on the day of the review. For example,
the review assesses whether the consumers’ needs are
met consistent with their ISPs, based on a review of the
contents of each consumer’s file and interviews with one
or more members of the clinical team, consumer, and/or
a member of the consumer’s family, which are all
completed in one day. The court monitor is to determine whether a consumer’s
needs are met on the day the review takes place in the areas of housing, working
or learning, and social activities. If one of these areas is deemed deficient, the
consumer is considered to have “unmet needs.” The exit stipulation does not
require the court monitor to measure whether a consumer had made incremental
progress in one of those areas, such as whether a consumer went from living in
the Arizona State Hospital, to living in a residential facility, to then living
independently in an apartment.
Experts and clinical advisers attribute the Division’s lack of focus on consumer
outcomes to the rigidity of process measurements in the lawsuit agreements. For
example:
Office of the Auditor General
page 23
Examples of 1991 Blueprint requirements
arising from the Arnold v. Sarn lawsuit
Clinical team
􀁺􇩅 Each consumer shall have an assigned case
manager.
􀁺􇩒 Responsible for locating and obtaining services.
􀁺􇩍 Monitor services and assess continued
appropriateness and effectiveness.
Service planning
􀁺􇩉 ISP to be developed no later than 30 days from the
date of consumer application or referral for
services.
􀁺􇩃 Case manager, in conjunction with clinical team, is
responsible for locating services identified in ISP
and monitoring their delivery.
􀁺􇩉 ISPs shall be reviewed and revised every 6 months.
Quality assurance
􀁺􇩄 Division shall design a comprehensive system of
monitoring, evaluation, and quality assurance for
all areas covered by the Blueprint.
􀁺􇩔 The system shall evaluate appropriateness,
individualization, and effectiveness of services.
􀁺􇩔 The system shall include consumer and family
satisfaction with services.
State of Arizona
page 24
Experts and clinical
advisers attribute the
Division’s lack of focus
on consumer outcomes
to the rigidity of process
measurements in the
lawsuit agreements.
􀁺􇩏 One expert who participated in auditors’ Web-based discussion said the
managed behavioral healthcare system in Maricopa County is caught
between a paternalistic model and recovery-oriented model because of
lawsuit requirements that focus on measuring process instead of outcomes,
and another expert commented that the rigidity of the requirements has
stymied the system in its efforts to improve.
􀁺􇩃 Clinical advisers said the lawsuit drives the Division to take actions and use
oversight mechanisms based on measuring processes instead of outcomes,
causing clinical teams to work to meet administrative requirements rather than
consumer needs. They said that what the Division and ValueOptions report as
a success is not necessarily based on consumer outcomes, but instead
focuses on counting the number of ISPs completed, attributing this to the
desire to meet court-ordered, procedural requirements.
Auditors found indications that, while progress is being made in some areas, it is
not necessarily recognized by existing review mechanisms. For example, experts
who participated in the Web-based discussion commended the Division and
RBHA for increasing community-based housing and launching innovative housing
projects, which have provided consumers with more and better options for safe,
secure living arrangements. In addition, some of the cases auditors reviewed
demonstrated that if the Division could better measure outcomes, such as
independent living or reduction in substance abuse, it might be able to report
consumer progress. For example, two consumers had clearly made progress
toward recovery, even though their needs had not been fully met at the time of a
July 2005 review by a court monitor who oversees compliance with the Arnold v.
Sarn court requirements:
􀁺􇩊 Jeff, the 55-year-old man with schizophrenia whose medications were not
adequately monitored by a service provider, had lived in the state hospital for
15-18 years and then moved to a supervisory care home, according to the
court monitor. In 2005, he moved from the supervisory care home into an
apartment by himself. While he had difficulties taking care of his apartment,
such as cleaning and operating his air conditioner, he attended social
activities and used public transportation. His clinical team was attentive to his
needs by helping him with household management, and considered his long-term
goals in his ISP appropriately. According to the court monitor, Jeff moved
back to a supervisory care home in 2006 because taking care of an apartment
was too difficult for him. Although Jeff had unmet or only partially met needs
in some areas, his accomplishments in 2005 represent significant progress
compared to his prior residence in the state hospital.
􀁺􇩄 Daniel, a 35-year-old man with bipolar disorder and a substance abuse
problem who received services valued at approximately $14,370 in fiscal year
2005, is making progress in his recovery according to his clinical team. His
team focused their efforts on helping him diminish his symptoms and improve
his functioning and worked together to get him direct assistance from the
Office of the Auditor General
page 25
clinic’s substance abuse specialist. The team engaged Daniel in his
treatment, supported him when he made progress and when he relapsed,
and followed up with him when he missed therapy sessions. The clinical team
also supports Daniel’s musical interests, and Daniel played his guitar at the
clinic. Although the court monitor review found that Daniel’s needs for
housing, working or learning, and social activities were only partially met, the
clinical team reported that Daniel made progress in his substance abuse
recovery during the year.
To effectively implement recovery model, Division must
focus on measuring outcomes
Behavioral health experts believe that measuring consumer progress can help
increase accountability of mental health systems and provide a basis for improving
consumer outcomes. Thus, while the Division has made some efforts to measure
outcomes, it should continue to move to greater incorporation of outcome measures
based on consumer progress, such as employment and number of crises, into its
quality management system and RBHA contract (see text box). For example, The
Village, a Southern California behavioral health program, uses a set of measures that
include employment, independent living, symptom distress rated by clients, and level
of functioning rated by staff.1 Other examples of outcome measures include days
in jail and days of involuntary hospital care.
Division has made some efforts to measure outcomes—Although
to date its oversight has focused mainly on process, the Division has begun
focusing on outcomes in its quality management and contractual oversight.
In addition, a now-ended program developed with one-time funding illustrates
the Division’s ability to measure outcomes, and the Division is participating in
two national measurement projects:
􀁺􇩑 Quality management pilot test—In an effort to focus more on outcomes, the
Division is pilot testing a process to measure outcomes for people with SMI in
its quality management plan in the areas of employment, stable-living
situation, social support, reduction of the use of in-patient hospitalization,
decreased criminal justice involvement, and access to services. The Division
is evaluating its data and indicators, and formalized the processed in June
2006.
􀁺􇩏 Oversight of contractual compliance—In January 2006, the Division
developed new outcome measurement standards for its annual Independent
Case Review (ICR) process, which is used to measure compliance with
financial incentive performance indicators included in the ValueOptions’
contract for fiscal years 2006 and 2007. The new standards provide specific
1 The Village Integrated Service Agency.
Outcome measures
Indicators that can be used
to assess a consumer’s
change in status after having
received services.
State of Arizona
page 26
guidance for measuring consumers’ clinical outcomes, such as a decrease in
criminal activity or increased participation in social activities. These standards
will be used to determine whether ValueOptions will be eligible to earn a
portion of its financial incentive for fiscal years 2006 and 2007.
􀁺􇩈 HB2003 program—The Division measured consumer outcomes associated
with a recently concluded program for adults with SMI. The Legislature
required the Division to develop performance measures and assess
outcomes of new programs established using one-time funding from the
State’s tobacco litigation settlement.1 For example, the Division measured the
impact of housing, rehabilitation, and intensive case management programs
on consumers’ level of functioning, use of hospitalization, and substance
abuse. The Division developed a system to collect data to measure consumer
outcomes from the services they received, but according to the Division, now
that the pilot program is over, the Division is no longer collecting some of this
outcome data.
􀁺􇩎 National measurement projects—The Division participates in two national
projects related to the collection of outcome data. According to the
Department, it has incorporated survey questions from the Mental Health
Statistics Improvement Program into its state-wide consumer survey, which
includes the assessment of the outcomes of services.2 In addition, the
Division provides outcome data to the U.S. Department of Health and Human
Services Substance Abuse and Mental Health Services Administration
(SAMHSA), which is working with states to achieve a performance
environment with true accountability.3
While the Division uses mechanisms within its contract and quality management
system to oversee quality of care of behavioral health services, to date, these
measures have been based on process and have not focused on what is
accomplished through system expenditures. For example, the contract with
ValueOptions includes performance measures for fiscal year 2005 that are passed
down from the Division’s contract with AHCCCS that measure such things as access
to care, coordination of care with primary care physician, and consumer/family
involvement in the treatment planning process. In addition, AHCCCS requires the
Division to measure ValueOptions’ performance in “quality clinical outcomes,” but
until fiscal year 2006, performance standards in the Division’s contract with
ValueOptions did not specify what the outcomes should be, such as employment or
reduced number of days in jail.
The Division participates
in two national projects
related to the collection
of outcome data.
1 House Bill 2003, Laws 2000, Fifth Special Session, Chapter 2, §§1 and 5. See Auditor General Report No. 04-03 for
additional information on the HB2003 program.
2 The Mental Health Statistics Improvement Program is a national program that provides uniform, comparable statistical
information about mental health services to enable broad-based research on systems of care and models for service
delivery. It focuses on the need for and development of data standards for high-quality statistical information on mental
health services.
3 The U.S. Department of Health and Human Services Substance Abuse and Mental Health Services Administration
collaborated with states to identify ten domains for national outcome measures for substance abuse and mental health
services, including employment/education, crime and criminal justice, stability in housing, and social connectedness.
Office of the Auditor General
page 27
1 The current Maricopa County contract is effective for 3 years, starting with fiscal year 2005. The contract stipulates
performance incentives of up to 1 percent additional allowed profit for each contract year, with a base profit of 4 percent.
Division should take further action to measure outcomes—To help
increase accountability of the Maricopa County mental health system and provide
a basis for improving consumers’ outcomes, the Division should continue its
current efforts and take some additional steps as follows:
􀁺􇩄 Define outcome goals and develop appropriate outcome measures—
Outcome goals should be measurable and capable of being tracked and
used to improve treatment. Measures should be based on consumer
progress, such as employment and reduced use of crisis services. In February
2006, representatives of the Division, ValueOptions, and the court monitor’s
office visited The Village in Southern California and learned about their
outcome measures. The Division should build on these steps and use the
results of its quality management plan pilot test, as well as the measures used
in the HB2003 program and by SAMHSA, to define outcome goals, and
develop appropriate outcome measures and a system-wide focus on
measuring recovery outcomes.
􀁺􇩃 Continue to incorporate outcomes and financial incentives into its contract
with the RBHA—The quality of services delivered to adults with SMI depends
in large part on the quality of the contracting process. While contracts and
financing mechanisms do not ensure quality, they influence the conduct of
managed care providers. For instance, Massachusetts has helped ensure
quality by tying earnings to performance outcomes in its behavioral health
managed care contract. In addition, SAMHSA reports that financial incentives,
a flat dollar amount or a percentage of profits, can be used to measure the
performance of a managed care provider and they should be large enough to
influence the behavior of the managed care provider. Further, a behavioral
health expert who has consulted with approximately 40 state governments on
their mental health systems recommended allowing ValueOptions to earn a
base profit margin of 1-2 percent for accepting the financial risk of delivering
services, and an additional maximum allowable profit margin should be
established based on compliance with outcome measures. The Division
already implemented a profit incentive in fiscal year 2005 by setting a base
profit of 4 percent and allowing ValueOptions to earn another 1 percent
through complying with certain contract provisions regarding consumer
access to care, which ValueOptions earned. Starting in fiscal year 2006,
ValueOptions can also earn incentives by meeting performance thresholds
related to symptom and functional improvement, satisfaction, coordination of
care, cultural competency, and consumer and family involvement.1 Thus, the
Division should continue and build on these efforts to tie a portion of
ValueOptions’ profits to achieving agreed-upon performance outcomes, such
as consumers having a certain number of days in stable housing (see
recommendations text box, page 28).
The Division should tie a
portion of ValueOptions’
profits to achieving
agreed-upon
performance outcomes.
State of Arizona
page 28
As part of its contractual provisions to collect consumer outcome data, the
Division should ensure that an information management system exists to
properly collect accurate outcome data that can be used to reliably measure
recovery outcomes. The fiscal year 2008 request for proposals should require
the vendor to demonstrate that it has an adequate information technology
system to collect, report, and validate agreed-upon outcome data (see
recommendations text box).
As part of its efforts to focus on outcomes, the Division should consider renegotiating
criteria in the court orders arising from the lawsuit. While the Division, plaintiffs, and
court monitor agreed on steps in January 2006 to improve the reliability and
consistency of the annual review methodologies, these enhancements did not
address the underlying requirements to focus on process rather than consumer
outcomes. The Division should determine which court mandates focus on process
rather than outcomes and inhibit full implementation of an outcome-oriented model,
discuss this with the plaintiffs, and work to modify the provisions (see
recommendations text box). For example, the lawsuit exit stipulation requires a
certain portion of the population to have all of their needs met, as identified on their
ISP, but does not assess whether the goals listed in the ISP will help the consumer
improve his or her functioning and recover, or whether the consumer is making
progress based on the services he or she receives.
The Division should
consider renegotiating
measures of
improvement in the
court orders arising from
the lawsuit.
􀁺􇩉 Implement outcome measures into the RBHA contract.
􀁺􇩄 Develop a more effective quality management system that is based on the measure of
outcomes to identify areas of improvement and move away from the focus on process.
􀁺􇩅 Ensure that the data used to measure outcomes and to make improvements in the system
is validated.
􀁺􇩒 Renegotiate with the plaintiffs the objective measures of improvement in the lawsuit exit
stipulation.
􀁺􇩐 Provide incentives that are aimed toward desired outcomes.
􀁺􇩕 Use data collection as a management tool and to supervise cases, including quality
management.
􀁺􇩒 Renegotiate Appendix C of the exit stipulation to focus on outcomes.
Office of the Auditor General
page 29
Recommendations:
1. The Division should continue its implementation of the Boston University training
program by monitoring the RBHA’s compliance with the recovery model and
ensuring that the Maricopa County RBHA:
a. Continues to train clinical leadership and staff; and
b. Maintains the training principles in service planning and clinical practices.
2. The Division should incorporate measurement of consumer outcomes into its
oversight mechanisms by:
a. Using the results of its quality management plan pilot test, as well as the
measures used in the HB2003 program and by SAMHSA, to define
outcome goals and develop appropriate outcome measures;
b. Continuing to incorporate these measures into the Division’s quality
management plan and RBHA contract;
c. Continuing to tie a portion of the RBHA’s profits to achieving agreed-upon
performances outcomes;
d. Ensuring that an information management system exists to properly collect
accurate outcome data that can be used to reliably measure recovery
outcomes; and
e. Requiring the RBHA to demonstrate that it has an adequate information
technology system to collect, report, and validate agreed-upon outcome
data.
3. The Division should consider renegotiating measures of improvement in the
court orders arising from the Arnold v. Sarn lawsuit by:
a. Determining which court mandates focus on process rather than outcomes
and inhibiting full implementation of an outcome-oriented model; and
b. Discussing this with the plaintiffs and working to modify the provisions.
State of Arizona
page 30
1 The Division’s contracts with RBHAs that serve other areas of the State also allow use of SMI monies for other programs.
Office of the Auditor General
page 31
Division can improve financial oversight and limit
use of SMI monies
Many of the Division’s tools for monitoring the solvency and expenses of
ValueOptions and other RBHAs appear to be working reasonably, but some can be
improved. Financial solvency is important to ensuring that RBHAs can continue to
deliver services without interruption, and the Division has several mechanisms that
appear to be adequately monitoring ValueOptions’ solvency. Similarly, many steps for
controlling expenditures, such as contractual restrictions on profits and
administration, are in place. However, current audit requirements can be
strengthened so that audits become better tools for ensuring compliance with these
requirements. Besides strengthening controls in this way, the Division—and if
necessary, the Legislature—should consider restrictions that would prohibit using
monies appropriated for SMI for other programs. As allowed by contract, over the
past several years, ValueOptions has used more than $21 million in SMI monies for
other programs.1
Monitoring of solvency appears adequate
The Division employs several mechanisms to help ensure and monitor RBHA financial
solvency. Monitoring solvency is important to avoid interruptions in service, as
illustrated by a past RBHA’s financial failure. In 1997, the RBHA for Maricopa County
at the time—ComCare—reached a bankruptcy settlement, necessitating state
takeover of services until a new contractor could be found. The main mechanisms
used by the Division show that ValueOptions is reasonably solvent.
􀁺􇩍 Measuring financial solvency—The Division requires ValueOptions to meet
commonly used financial measures to ensure that it remains solvent,
such as having sufficient assets to meet short-term obligations. As of
June 30, 2005, a division monitoring report showed it was in
compliance with these requirements. AHCCCS uses similar measures
to check the solvency of acute care (medical) and long-term care
providers.
A former RBHA financial
failure illustrates the
importance of financial
oversight.
FINDING 3
Financially solvent—Capable of
meeting financial obligations.
State of Arizona
page 32
􀁺􇩅 Enforcing other standards to ensure solvency—The Division
requires ValueOptions to meet standards intended to ensure
that it remains solvent. In some cases, the Division’s
requirements are higher than AHCCCS’ requirements for acute
care and long-term care providers. For example, the Division
requires ValueOptions to maintain at least $300 equity or
unobligated assets per enrolled member, while AHCCCS
requires no less than $100 or $150 for its acute-care providers,
depending on the provider’s size. As of June 30, 2005, a
division monitoring report showed ValueOptions equity per
enrolled member was $698, and division records show
ValueOptions also complied with all of the solvency standards
such as capitalization requirements and performance bonds
(see text box).
􀁺􇩐 Placing limits on losses—To help protect ValueOptions against
financial failures, the Division limits the amount the company
can lose on the contract. Specifically, the contract between the
Division and ValueOptions limits losses to 4 percent of certain
revenues. For example, if ValueOptions’ losses in its Medicaid
program exceed 4 percent, the Division may reimburse the
losses subject to available funding.
Division oversees spending in multiple ways
Besides checking for solvency, the Division uses a number of methods to oversee
how monies are spent. Monitoring spending is especially important in a capitated
system like Arizona’s, where the RBHA is paid in advance to deliver behavioral health
services instead of receiving payment for services delivered. The Division’s methods
center on two main approaches: analyzing financial reports and conducting various
types of audits. For the most part, these approaches appear to be working
reasonably.
Analyzing financial reports—The Division analyzes ValueOptions’ monthly,
quarterly, and annual financial statements to determine the RBHAs’ compliance
with financial requirements and spending limitations that help monitor spending.
The Division monitors spending through the following:
􀁺􇩍 Minimum spending levels for services—The Division establishes minimum
expenditure levels for services to help ensure that an adequate level of
services are provided. Specifically, the Division requires ValueOptions to
spend at least 88.5 percent of each type of contract revenue—Medicaid,
KidsCare, and others—on services. These limits are higher than those
Measures of financial solvency
􀁺􇩃 Current ratio measures ability to pay for short-term
obligations (current assets divided by
current liabilities). Division requires current
ratio of at least 1.
􀁺􇩄 Defensive interval measures the number of
days a provider can operate on assets that can
be quickly converted into cash. Division
requires defensive interval of at least 30 days.
Standards to ensure solvency
􀁺􇩅 Equity per enrollee—Division requires net
worth of at least $300 per enrolled member.
􀁺􇩃 Capitalization requirements—Division requires
the RBHA to maintain net assets greater than
or equal to 90 percent of monthly revenues but
no less than $10 million, whichever is greater.
􀁺􇩐 Performance bond—Division requires a bond
to guarantee payments to providers. As of July
2006, ValueOptions’ bond totaled nearly $50
million.
Office of the Auditor General
page 33
imposed by AHCCCS, which requires its acute care providers to spend at
least 80 percent of contract revenues on services and its long-term care
contractors to spend at least 85 percent of contract revenue on services. A
division monitoring report shows that ValueOptions met this requirement
during fiscal year 2005.
􀁺􇩌 Limits on administrative expenses—The Division limits ValueOptions’
administrative expenses. For example, ValueOptions can spend up to 7.5
percent of its Medicaid revenues on administrative expenses related to its
Medicaid programs, and up to 7.5 percent of its KidsCare revenues for
KidsCare-related administrative expenses. Again, these limits are more
stringent than those that AHCCCS imposes, which limits administrative costs
for acute care providers to no more than 10 percent of the contract revenue
and administrative costs for long-term providers to no more than 8 percent.
Placing limits on administrative expenses is also in line with practices that the
auditors found in reviewing relevant literature.1 A division monitoring report
shows that ValueOptions substantially met this requirement during fiscal year
2005.2
􀁺􇩌 Limits on service profits—The Division limits ValueOptions’ profits on service
revenues.3 Specifically, for fiscal year 2005, there is a 4 percent limit on service
profits for Medicaid, KidsCare, and other contract monies, respectively. In
addition, its children’s program service profits are also limited to 4 percent of
service revenues in each category.4 If ValueOptions has service profits of more
than 4 percent in one of these categories, it must return the excess monies to
the Division within 12 months of fiscal year-end. The Bazelon Center for Mental
Health Law and the federal SAMHSA recommend that public payers,
including states and local authorities, consider limiting profits.5 Further,
SAMHSA reports that public payers such as states consider less than 5
percent to be a reasonable profit margin.6 As illustrated in Table 3 (see page
34), a division monitoring report shows that ValueOptions’ service profits were
ValueOptions met
spending standards in
fiscal year 2005.
1 Koyanagi, Chris. Managing Managed Care for Publicly Financed Mental Health Services. Washington, D.C.: Judge David
L. Baselon Center for Mental Health Law, 1995; U.S. Department of Health and Human Services. Office of the Inspector
General. Cost-Saver Handbook. Washington, D.C.: DHHS, 2004.
2 ValueOption’s KidsCare administrative expenses were 0.05 percent over the limit in fiscal year 2005. A division official
explained that administrative expenses in excess of limits decreased ValueOptions’ overall profits.
3 Service revenue equals 92.5 percent of total Department of Health Services revenue adjusted for certain payables and
receivables.
4 Combined administrative expenses and profits for House Bill 2003 programs are limited to 8 percent of these program
revenues. The Legislature appropriated one-time funding for these programs in fiscal year 2001, and this program ended
on July 1, 2005.
5 Koyanagi, Chris. Managing Managed Care for Publicly Financed Mental Health Services. Washington, D.C.: Judge David
L. Bazelon Center for Mental Health Law, 1995; Moss, Stephen. Contracting for Managed Substance Abuse and Mental
Health Services: A Guide for Public Purchasers. Technical Assistance Publication Series #22. DHHS Publication No.
(SMA) 98-3173. Rockville, MD: U.S. Department of Health and Human Services, Public Health Service, Substance Abuse
and Mental Health Services Administration, Center for Substance Abuse Treatment, Oct. 1998.
6 Savela, Terry, Gail Robinson, Sarah Crow. Contracting for Public Mental Health Services: Opinions of Managed Care
Behavioral Health Care Organizations. DHHS Publication No. (SMA) 00-3438. Rockville, MD: U.S. Department of Health
and Human Services, Substance Abuse and Mental Health Services Administration, Center for Mental Health Services,
2000.
State of Arizona
page 34
well within its contractual limits during fiscal year 2005, although it was
required to return approximately $1.5 million because it exceeded contract
limits in the “other monies” children’s funding category.
Requiring audits—In addition to analyzing financial reports, the Division
requires ValueOptions to obtain several audits. Most of these audits are
conducted to ensure that financial reports accurately reflect ValueOptions’
activities. Specifically, the Division requires:
􀁼􇱁 An annual audit of ValueOptions’ financial statements—This audit,
conducted by an independent auditor, provides reasonable assurance
that the financial statements are free of material misstatements and
reliable. In fiscal year 2005, this audit found that ValueOptions’ financial
statements reasonably represented its financial position.
􀁼􇱁 An opinion on ValueOptions’ statements of activities—Similar to the
financial statement audit, this opinion provides reasonable assurance
of the accuracy of these statements. The statements of activities
present a more detailed description of revenues and expenses than
what is found in typical financial statements. Specifically, revenues and
expenses are reported by different types of programs, including
Medicaid children, Medicaid adult with SMI, and general mental health
programs. In addition, expenses are segregated into 13 different
Medicaid KidsCare
Other
Monies
Service revenues¹ $332,366,387 $6,745,651 $112,944,051
Service and income taxes expenses 326,617,921 6,536,714 110,001,617
Service profits $ 5,748,466 $ 208,937 $ 2,942,434
Allowable service profits² $ 13,294,655 $ 269,826 $ 4,517,762
Contractual service profit limit 4.0% 4.0% 4.0%
Achieved service profit3,4 1.7% 3.1% 2.6%
¹ Service revenues in this table represent total contract revenues, excluding HB2003 and
PASARR (pre-Admission Screening and Resident Review), less 7.5 percent allowed for
administrative expenses, or 92.5 percent of each program fund’s total contract revenues
excluding HB2003 and PASARR.
² Allowable service profits equal 4 percent of total service revenues.
³ Service profit achieved equal service profits divided by service revenues.
4 The Division’s profits/risk corridor analysis, based on ValueOptions’ audited financial
statements, reflects accounting adjustments for timing and other factors. ValueOptions’
analysis based on its audited financial statements shows service profits for Medicaid,
KidsCare, and Other Monies of 1.8 percent, 3.1 percent, and 1.9 percent, respectively.
Source: Auditor General staff analysis of the Division’s profits/risk corridor analysis for
ValueOptions for fiscal year 2005.
Table 3: ValueOptions’ Compliance with Service Profits Limits
By Program Fund Category
Fiscal Year 2005
(Unaudited)
Office of the Auditor General
page 35
service categories such as treatment, crisis intervention, and residential
services. In fiscal year 2005, this audit found that these statements
reasonably represented ValueOptions’ activities.
􀁼􇱁 An audit to determine compliance with U.S. Office of Management and
Budget Circular A-133 (OMB A-133)—This audit determines compliance
with federal requirements for ValueOptions programs funded
with federal grants. Typically, an OMB A-133 audit is
mandated by the federal government when a state or local
government or a not-for-profit entity spends more than
$500,000 of federal grant monies. However, beginning in its
fiscal year 2005 contract, the Division required ValueOptions,
a for-profit entity, to have an OMB A-133 audit of its federal
grants. As part of this review, independent auditors examined
internal controls over financial reporting and compliance with
laws, regulations, and contract provisions that have a
material effect on federal programs (see text box).
Audit results demonstrate need for additional oversight
Although recent efforts to increase monitoring through added audit requirements
resulted in the recovery of $1.5 million, most monies and contractual provisions are
not subject to all the current requirements. In the OMB A-133 audit, independent
auditors found that ValueOptions had not evaluated by fund source its estimate for
claims not yet reported by its providers. After discovering the error when reviewing
federal programs, the independent auditors recommended corrections to claims
estimates for all programs. They found that because ValueOptions did not evaluate
claims by fund source there was an error in the claims estimate for non-Medicaid
children’s services. This error resulted in overstating expenses and understating
ValueOptions’ service profit. When the error was corrected, the independent auditors
determined that ValueOptions had more service profits in the “other monies”
children’s funding category than it was allowed to earn under its contract with the
Division. ValueOptions returned approximately $1.5 million in excess service profits
to the Division in February 2006.
While valuable, the OMB A-133 audit examined only 4.8 percent of the money the
Division provided to ValueOptions in fiscal year 2005. In fiscal year 2005, the Division
provided over $489 million to ValueOptions, including federal grant programs totaling
$23.5 million. OMB A-133 auditors were only required to examine the federal grant
programs, which do not include the largest funding source, Medicaid. A compliance
audit covering the nearly $466 million of nonfederal program monies it received from
the Division could have resulted in the discovery of other types of problems.
Examples of OMB A-133
compliance requirements
􀁺􇩁 Allowable and unallowable
activities
􀁺􇩁 Allowable and unallowable costs
􀁺􇩃 Cash management
􀁺􇩐 Procurement
􀁺􇩒 Reporting requirements
􀁺􇩓 Sub-recipient monitoring
State of Arizona
page 36
Further, although audits of financial statements provide reasonable assurance
regarding ValueOptions’ financial reporting and use of program monies, they do
not sufficiently enable the Division to ensure that monies are spent appropriately.
Financial statement audits show that ValueOptions recorded its revenues,
expenses, assets, and liabilities accurately. However, these audits are not
designed to test compliance with all division requirements. For example, these
audits may or may not include checking compliance with division contract limits on
administrative expenses or minimum requirements for service expenditures.
The Division should continue to strengthen its audit requirements over contractual
requirements and nonfederal monies. To better ensure monies are spent
appropriately, the Division should consider adding an audit requirement for all non-federal
program monies that tests for compliance with requirements important to
the Division. These audit requirements for nonfederal monies can include the
following:
􀁺􇩒 Requiring a compliance audit following AICPA’s Professional Standards for
Attestation Engagements. These standards establish guidelines for
conducting an attestation review and determining compliance with a defined
requirement. An attestation engagement is similar to an audit; however, it is
more flexible in that it would allow the Division to define what topics,
requirements, or standards should be covered by the review. By requiring this
type of review, the Division would ensure that ValueOptions’ independent
auditors determine compliance with requirements important to the Division.
􀁺􇩄 Determining which compliance requirements and standards should be met
and how frequently specific requirements should be tested. For example, the
Division could require the reviewer to examine a limited number of
requirements each year on a rotating basis in order to cover all important
standards over a period of several years, while limiting the costs of the
reviews. The Division can consider rotating requirements based on prior
years’ audit results and risk of noncompliance.
After obtaining audit reports, the Division should review the results of the required
audits and take action when appropriate.
Additional spending restrictions should be considered
Although the Division limits profits to a percentage of each type of service
revenue—Medicaid, KidsCare, and other—it allows ValueOptions to use monies
allocated for adults with SMI for other programs, including programs for children,
adult general mental health, and substance abuse. If the Legislature wants to
ensure that its appropriations are used to provide services to adults with SMI, it
Compliance Audits Can
Follow AICPA Standards
The American Institute of
Certified Public Accountants
issues professional standards
for compliance audits and
attestation engagements.
The audit for compliance
with federal requirements
was limited to a small
portion of contract
revenues.
Office of the Auditor General
page 37
may wish to consider limits on the use of these
monies similar to the limits established on
appropriations for children’s behavioral health
programs.
SMI monies have been used to deliver
services for other consumers—The
Division allows ValueOptions to use revenues
allocated for adults with SMI to be used to
support or make up for losses in other
programs. The Legislature has increased
appropriations for services to adults with SMI in
the past several years, although appropriations
dropped from fiscal year 2004 to fiscal year
2005 (see Figure 6). Specifically, the
Legislature increased its appropriations by
approximately 119 percent between fiscal
years 2002 and 2007. These monies include
appropriations intended to address requirements
of the Arnold v. Sarn lawsuit.
Because neither statute nor the Division’s contract with ValueOptions restricts the use
of monies allocated or appropriated to serve adults with SMI, the monies can be
used to fund services for other populations. By contract, starting in fiscal year 2005,
the Division allows ValueOptions to earn up to 4 percent profit on service revenue
within each major program—Medicaid, Kidscare, and other contract monies. Within
each of these major programs, though, ValueOptions can use SMI monies for other
categories within the same program. For example, it can use SMI Medicaid funds for
other Medicaid funding categories, such as children’s programs or adult substance
abuse programs. Auditors reviewed the Division’s analyses of ValueOptions’ profits
and losses for fiscal years 2002 to 2005 and found that some revenues the Division
allocated to ValueOptions to pay for services for adults with SMI were used to make
up losses in other programs, as allowed by contract. Specifically, in fiscal year 2002,
ValueOptions used $7.5 million of Medicaid and KidsCare SMI monies to make up
losses in other Medicaid and KidsCare programs, including programs for children,
adult general mental health, and substance abuse. Similarly, ValueOptions used $6.9
million of Medicaid and KidsCare SMI monies in fiscal year 2003 and $7 million in
fiscal year 2004 for these programs. In fiscal year 2005, ValueOptions did not use SMI
monies to offset losses in other programs.
In addition to using adult SMI monies to offset other programs’ losses, ValueOptions
has used these monies disproportionately to earn its allowed profits. As illustrated in
Figure 7 (see page 38), ValueOptions used net income it earned from its SMI
Medicaid program to offset other Medicaid program losses, as allowed by contract.
The most significant offset occurred in fiscal year 2004, when it used $15.8 million
Neither statutes nor
contract provisions
restrict the use of
monies appropriated for
adults with SMI.
$0
$100
$200
$300
$400
$500
2002 2003 2004 2005 2006 2007
Fiscal Year
Millions
Source: Auditor General staff analysis of appropriations reports for fiscal years 2002
through 2007 prepared by the Joint Legislative Budget Committee.
Figure 6: Legislative Appropriations for
Behavioral Health Services for Adults with SMI
Fiscal Years 2002 through 2007
State of Arizona
page 38
from SMI Medicaid monies to offset $9.7 million in losses in other Medicaid
programs. ValueOptions had losses totaling $6 million in its children’s Medicaid
programs and $3.7 million in non-SMI adult Medicaid programs that year. Still, it
earned approximately $6.1 million in total profit from all Medicaid programs, which
includes $6.0 million in service revenue, representing 2.17 percent of Medicaid
service revenue. This was below the fiscal year 2004 contractually allowed profit
of 5 percent. However, the profit came entirely from Medicaid SMI monies
because all other programs incurred losses. In fiscal year 2005, ValueOptions did
not use SMI Medicaid monies to offset losses in other Medicaid programs, as it
had in previous years.
Given that the Legislature has increased funding to provide more services and
meet requirements associated with the Arnold v. Sarn lawsuit (see Appendix A),
the Division should consider limiting the use of monies allocated for adults with
2.8
-6.0
2.2 3.0
15.8
3.2
13.2
14.2
1.2
-6.2 -6.1 -2.3 -1.6 -0.3 -1.4
-$10
-$5
$0
$5
$10
$15
$20
2002 2003 2004 2005
Fiscal Year
Millions
Children
Adults with SMI
Adults with General Mental Health and Substance Abuse Issues
Adults with Developmental Disabilities2
Figure 7: ValueOptions’ Medicaid Programs Losses and Profits1
In Millions of Dollars
Fiscal Years 2002 through 2005
(Unaudited)
1 Figure does not include other funding sources, specifically KidsCare and other contract monies.
2 ValueOptions receives Medicaid monies to provide behavioral health services to adults with
developmental disabilities, including adults with SMI. These monies were included in the children and
adults with SMI programs in fiscal year 2002.
Source: Auditor General staff analysis of the Division’s profits/risk corridor analysis for ValueOptions for fiscal years 2002
through 2005.
Office of the Auditor General
page 39
SMI. Specifically, the Division should consider a contract provision that would limit
using monies allocated to fund programs for adults with SMI to make up for losses
in other programs. A contractual requirement limiting the use of SMI monies would
restrict ValueOptions’ ability to manage behavioral health services because it would
not be able to transfer money between programs. However, the Division would still
maintain the ability to transfer monies among programs to meet unexpected needs
or demands.
If the Legislature wants to ensure its adult SMI appropriations are used to provide
services only to adults with SMI, it may wish to consider statutorily limiting the use of
these monies similar to the limits it has placed on appropriations for children’s
programs. In 2000, the Legislature enacted A.R.S. §36-3410, which limits the use of
appropriated monies for children’s behavioral services to be used as intended by
their appropriation. Thus, the Division’s contract with ValueOptions establishes that
any excess profits in children’s programs may not be used to offset losses in
programs for adults, including adults with SMI. Instead, these excess monies must
be returned to the Division within 12 months after the end of the fiscal year. As the
Legislature considers whether to similarly restrict adult SMI monies, it should
consider the impact this tighter control may have on other programs. Specifically,
imposing this statutory limit would reduce ValueOptions’ and the Division’s flexibility
to manage behavioral health services and use available monies to meet unexpected
needs.
Recommendations:
1. To better ensure monies are spent appropriately, the Division should consider
expanding the current compliance audit requirement to include all program
monies. If the Division determines a compliance audit is needed, it should:
a. Determine which requirements and standards are most important to it and
should be included as part of a contractually required audit;
b. Develop contract provisions that would require auditing nonfederal
program monies against those requirements; and
c. Review the results of these audit reports and take action when appropriate.
2. The Division should consider a contract provision that would limit the Maricopa
County RBHA’s ability to use SMI monies for other programs. As the Division
considers this option, it should consider the impact this contract limit would have
on the RBHA’s ability to manage other programs.
3. The Legislature may wish to consider statutorily limiting monies appropriated for
adults with SMI to be used only for this population. As the Legislature considers
this option, it should consider the impact on other behavioral health programs.
State of Arizona
page 40
Office of the Auditor General
page 41
Better oversight needed of service level provided
The Division should take steps to strengthen its contractual requirements in order to
better ensure that ValueOptions del